It is almost consensus that the Federal Reserve will raise interest rates on Thursday, why does Standard Chartered refuse to "surrender"?

With the countdown to the Federal Reserve’s September meeting underway, the market is holding its breath in anticipation of the policy direction.

A report released by Standard Chartered on September 14 clearly states that the Federal Reserve will keep rates unchanged at the September 15-16 FOMC meeting (the rate decision will be announced early Thursday morning Beijing time). In the bank’s view, further rate hikes remain a “wrong policy choice”; the more reasonable approach would be to wait until the tariff shock and recent data revisions subside before determining whether inflation has become a trend.

The issue is that the market has already bet quite aggressively. The probability of a 25 basis points rate hike in September is currently priced in at 88% in federal funds futures; if the Fed holds steady, the rates market may see a notable repricing and the dollar might weaken briefly. Conversely, if a rate hike is delivered, markets could further strengthen their hawkish expectations. Standard Chartered believes that in this scenario, Waller’s credibility could play a stabilizing role and support both the US dollar and the long end of US Treasuries.

Therefore, the trading focus for the September meeting is not just the rate decision itself, but also how the Fed communicates its subsequent policy path to the market, especially whether Waller can re-anchor expectations.

Inflationary Pressure May Be Overestimated, Tariff Shock Is Subsiding

The report argues that core inflation may be currently overestimated. Tariffs have indeed pushed up core PCE, but the extent and duration of the impact remain highly uncertain, and comprehensive GDP revisions may alter the market’s assessment of the economy and inflation trends. Until data stabilizes, the Fed has no need to rush into a rate hike.

The bank’s measurement of super-core CPI has seen a clear downturn recently, back to the normal range seen in the 2010s. The report contends that current CPI pressures come largely from goods prices, with tariffs playing an important role, but this does not mean that the economy has generated persistent internal inflation pressure.

Chained core CPI and core PCE have historically moved closely together, but have lately diverged significantly. The report notes that chained CPI better reflects actual consumer spending and that recent trends deserve policymakers’ attention.

Additionally, several analyses within the Federal Reserve suggest that tariffs may be contributing about 0.7 percentage points to PCE inflation. As tariff revenues peak in the fourth quarter of 2025, their inflationary effect may gradually fade in the following months. In other words, we may currently be in the window when the inflation shock from tariffs is beginning to subside.

From a risk management perspective, waiting for confirmation from data does not close off the option to hike rates. If subsequent data confirm a renewed rise in inflation, the Fed could still enact a one-time 50 basis points hike; conversely, if it hikes too early and has to reverse, it could damage policy credibility.

88% Rate Hike Pricing Rises, Waller Faces Policy Feedback Risk

Though Standard Chartered judges that the Fed should hold in September, the market has clearly shifted hawkish. Federal funds futures price an 88% probability of a 25 basis point hike in September and project a total of about 74 basis points of hikes by March next year. This round of rising expectations has been driven largely by Waller’s Jackson Hole speech.

However, the report notes that the market may have only picked up on the hawkish part of Waller’s speech. While Waller stressed the importance of bringing inflation back to target, he also pointed out that policymakers must determine whether underlying inflation is rising, falling, or stagnating—not just act on single data points.

Waller also warned that if the market relies on Fed guidance and the Fed in turn relies on market pricing, policymakers may overlook new economic changes, raising the risk of policy mistakes.

In Standard Chartered’s view, this risk is increasing. The higher the market’s rate hike expectations, the stronger the feedback constraint that market pricing imposes on policy, making it more likely the Fed will be influenced by existing expectations, forming a “market expectation drives policy, policy then reinforces market expectation” feedback loop.

Thus, if the Fed ultimately holds rates in September, the real focus will be on how Waller addresses the now-elevated rate hike expectations: he must both explain why a hike isn’t needed right now and prove that the Fed isn’t being led by market pricing.

Voting Logic Also Doesn’t Support a September Rate Hike

The voting structure is another key basis for Standard Chartered’s judgment. At the July FOMC, three members supported a hike; for a hike to occur in September, at least four members who originally leaned toward staying put would need to switch sides in order to reach the seven-vote threshold.

Standard Chartered believes Waller’s most probable strategy is to avoid being in the minority, but he won’t actively push for a hike. If four more members switch, he could join the hiking camp; if only three switch, he may vote for a hike to prevent a 6-6 split; if just two switch, he still has room to support staying put.

The key is whether data since the July meeting are enough to shift at least three “on hold” members. Standard Chartered thinks the current data are not yet sufficient for this.

The Real Test Is Waller’s Press Conference

The report expects the FOMC statement will not see significant changes. In the SEP, the dot plot may not turn markedly more hawkish, but compared to June, the space for rate cuts may narrow further and the weighted average rate level could rise somewhat.

If the Fed ultimately holds, Waller will face greater challenges at the press conference: he must explain why a hike isn’t needed now and clarify how the Fed will regard the market’s already entrenched elevated rate hike expectations.

The market may especially press on whether the possibility of a rate hike is retained for the October meeting. Waller is highly likely to emphasize “data-dependent decisions at each meeting,” but if clear policy triggers are lacking, doubts about his stance may persist in the market.

Therefore, the impact of the September FOMC depends not just on the rate decision itself, but also on whether Waller can effectively guide subsequent expectations. For the dollar and the long end of the US Treasury market, the key variable after the meeting will be how markets reprice the future rate trajectory.