Tomorrow's Fed Decision: Two Scenarios, and Why the Decision Itself Is Not the Most Important Factor

Tomorrow, September 16, the Fed will announce its interest rate decision, and the market is currently pricing in about an 87–90% probability of a 25 bps hike. But the real fork in the road is not whether the Fed raises rates or not—it is what happens afterward.

Scenario 1: The Fed raises rates (base case, most likely)

This is the scenario that is already almost fully priced in. The logic behind it is very simple and consistent. Fed Chair Kevin Warsh clearly shifted his rhetoric back at the Jackson Hole symposium, emphasizing that inflation has been above target for five and a half years and that financial conditions are currently not restrictive enough for an economy at full employment. This is a signal that the logic has changed from "hold rates unless data forces a hike" to "hike rates unless data forces a pause."

And the data has confirmed this very course. The August employment report came in hotter than all economist forecasts. The CPI remains above target at 3.4%, and the core CPI rose by 0.29% m/m—almost double the 0.17% pace needed to bring annual inflation back to 2%. Add to this oil prices above $100 per barrel due to supply disruptions in the Middle East, and the picture paints itself. No one on the FOMC is openly against a hike, Treasury Secretary Bessent appears to be in favor as well (he is nervously tracking the rise in long-term yields), and even Trump has effectively given his blessing, saying that Warsh "will do what he has to do."

The market carry-trade spread (spread to the Fed rate) has shot up to 90 bps—and anything above 75 bps is traditionally a market signal of readiness for a hike. All this makes a rate hike virtually inevitable.

Within this scenario, there are two sub-variants, and the difference between them lies in the rhetoric, not the decision itself:

The first option is a "dovish" hike: rates are raised, but the rhetoric partially lowers the intensity of expectations that surged after the latest CPI and establishes a softer course for the medium term.

The second option is a "hawkish" hike: rates are raised, and the rhetoric confirms a course of consecutive hikes and tighter policy until inflation is truly stabilized, essentially reviving the Fed's "higher for longer" thesis. The argument here is very strong and consistent—the data, the rhetoric, and market behavior all point in the same direction. The main uncertainty here is not "will they hike," but the tone itself—and that tone will determine how long the pressure on markets will last after the decision.

Scenario 2: The Fed holds rates (unlikely, but not zero)

This is the scenario that currently looks unpopular among traders and, judging by FedWatch futures positioning, but it has its own logic. Its essence is that the Fed almost never makes one isolated hike—therefore, the real choice is not between "hold" and "+25 bps," but between "hold" and "start a new hiking cycle." And to launch a full-fledged cycle, current data may not be critical enough. At least for making this decision in September.

The core services CPI remains stable at 3.0% year-on-year. The expected core PCE for August is around 3.1% annualized, versus approximately 3.2% over the last six months. This looks more like slow disinflation than re-acceleration. Additionally, financial conditions have already tightened on their own in recent weeks—meaning part of the work that a rate hike would have done has already been performed by the market itself.

And here is the main argument: the market is already pricing in not just the hike itself now, but also an approximately 75% probability of two or more hikes throughout 2026. In other words, even if the Fed hikes rates but makes it clear that this is a one-off action, that alone could prove to be a "dovish" surprise relative to what is currently priced in.

There is indeed disinflation in the core metrics, and the market may indeed have over-priced future hikes. But as a standalone scenario, "holding rates" looks weak against the backdrop of how far Warsh and the market have already gone in rhetoric and pricing since Jackson Hole. The most realistic form of this scenario is not an outright hold, but a "hawkish hold": rates are not raised, but the rhetoric makes it clear that it is just a matter of time and additional data, rather than choosing a permanent monetary policy course for the medium term.

What is actually more important than the decision itself

Historically, the Fed almost never limits itself to a single hike and then stops. Over the last few decades, the probability that one hike is followed by another has been approximately 85–90%. The reason is simple: +25 bps by itself changes almost nothing for the economy, and monetary policy acts with a lag—that is why the Fed usually continues moving in the same direction until it accumulates at least 75 bps of total hiking, i.e., 3 full rate hikes, or until it sees a noticeable change in the data.

There is another inconvenient argument: it is not a fact that the current rate level is sufficiently restrictive for the economy. Short-term rates have been at similar or higher levels for almost four years, and the economy is still growing fast enough for unemployment to remain at levels consistent with full employment.

An important nuance for the future: if Warsh decides to hold rates right now—after all his rhetoric since Jackson Hole led the market to expect a hike—this could hit his reputation as a Fed Chair independent of the White House. Given the public pressure from Trump to lower rates, any deviation from the course dictated by the data (inflation, labor market) will be quickly interpreted by the market and commentators not as a measured decision based on facts, but as a concession to political pressure. And since trust in the Fed's independence is a key factor in curbing inflation expectations and long-term bond yields, any crack in this reputation could have consequences extending far beyond a single meeting. In the absence of clear forward guidance from the Fed, the market itself fills in the picture based on every individual report—and that is the very reason why expectations can reverse so sharply and so quickly. When the central bank does not give a clear signal about the trajectory for several meetings ahead, every new CPI or employment report turns into an independent trigger for repricing, rather than just a confirmation of an already known course—hence the uncertainty we are seeing.