Following the CPI figures, investment banks are tearing up their reports: the camp that won't raise interest rates this year has "surrendered," while hawks are betting on three rate hikes by January next year.

Following the release of the US August CPI, Wall Street investment banks quickly adjusted their Federal Reserve interest rate forecasts. While the overall CPI rose 3.4% year-on-year and 0.4% month-on-month, both in line with expectations, the core CPI rose 0.3% month-on-month, exceeding the expected 0.2%, which became the direct trigger for many institutions to change their assessments.

The most obvious change is that institutions that previously expected the Federal Reserve to hold rates steady for the remainder of the year have now switched to betting on a rate hike in September; however, there is a clear division on Wall Street regarding whether to continue raising rates after September.

TD Securities' most hawkish forecast: Changing from "no change for the whole year" to expecting three rate hikes.

TD Securities saw the largest shift.

Previously, the bank expected the Federal Reserve to keep interest rates unchanged for the remainder of 2026; however, after the release of the August CPI, strategists including Oscar Munoz and Gennadiy Goldberg changed their prediction to that the Federal Reserve would start this round of rate hikes in September and raise rates a total of three times .

Specifically, TD Securities predicts:

• September: Interest rate hike of 25 basis points
• October: Another 25 basis point rate hike
• January 2027: Third interest rate hike of 25 basis points

Strategists believe that the August CPI indicates a lack of further progress in inflation, therefore the Federal Reserve will need to begin its rate hike cycle in September.

Regarding policy guidance following the September meeting, TD Securities expects the Federal Reserve may not provide clear forward guidance, but the dot plot should lean hawkish .

This means that among the major investment banks, TD Securities has the most aggressive assessment of the interest rate hike cycle: it not only includes a September rate hike in its baseline scenario, but also believes that tightening measures may continue until early next year.

JPMorgan Chase: Add one more in September and December, postpone in October.

JPMorgan Chase also abandoned its previous more wait-and-see approach, adjusting its forecast to a 25 basis point rate hike in both September and December .

Michael Feroli, the bank’s chief U.S. economist, said the reason for raising rates next week is simple: core PCE inflation has been above 3% every month this year, and recent progress toward the 2% target has been very limited.

JPMorgan Chase had previously predicted a December rate hike by the Federal Reserve, but believed that if inflation data overheated, the central bank might act as early as September. Now, with August's core CPI exceeding expectations, it has officially included a September rate hike in its forecast.

However, JPMorgan does not believe that the Federal Reserve will raise interest rates at every meeting.

Feroli believes there is a reasonable reason for pausing rate hikes in October—to take time to observe the impact of rate increases on the economy. Therefore, the bank's baseline path is a rate hike in September, a pause in October, and another rate hike in December.

Meanwhile, JPMorgan Chase believes that current inflation still appears to be primarily driven by supply shocks, and therefore the rate hike cycle will not continue into 2027 .

Mitsubishi UFJ: Rate hike paused after September, with a 55% to 60% probability of another rate hike in December.

Mitsubishi UFJ also completely abandoned its previous prediction of "maintaining the interest rate unchanged in 2026".

The bank's strategists, George Goncalves and Agron Nicaj, now expect a 25 basis point rate hike in September and no change in October .

Their reasons included Warsh's hawkish remarks at the Jackson Hole conference, the robust August employment data, and the latest CPI exceeding expectations.

However, MUFG believes this rate hike itself could be a "policy mistake." Strategists point out that with the market already highly anticipating a rate hike next week, it's difficult for the Federal Reserve to choose to remain on hold.

They particularly emphasized that since Warsh had repeatedly stressed that "inflation is one of the options," doing nothing after the latest data would create problems in policy communication.

Regarding the subsequent path, Mitsubishi UFJ expects a pause in October and believes there is a 55% to 60% chance of another rate hike in December .

Therefore, compared to TD Securities, Mitsubishi UFJ's forecast is closer to the path of "raising interest rates once, observing the effects, and then deciding whether to take action."

In addition, the bank raised its yield forecasts for most maturities of U.S. Treasury bonds by 25 to 50 basis points, now expecting the year-end yield for 2-year Treasury bonds to be 4.25%, 10-year to be 4.625%, and 30-year to be 5%.

Citigroup: Rates have remained unchanged since the September hike; another rate cut is expected next June.

Citigroup's latest forecast is closer to a "one-off rate hike in September".

Citigroup economists Andrew Hollenhorst and Veronica Clark expect the Federal Reserve to raise interest rates by 25 basis points in September and then keep rates unchanged until June 2027 .

The two believe that higher-than-expected core inflation in August, coupled with a resurgence in energy prices, "is likely just enough to reach a consensus" and support the Federal Reserve raising interest rates at its meeting next week.

However, Citigroup did not conclude that the Federal Reserve would re-enter a sustained rate hike cycle. On the contrary, the bank expects the Fed to begin cutting rates in June 2027 as inflation gradually declines, and to cut rates three times in total by the end of 2027 .

This means that Citigroup's latest path is:

September rate hike → prolonged period of inaction → rate cuts to begin in June 2027.

Previously, Citigroup had predicted that a weakening labor market would prompt the Federal Reserve to begin cutting interest rates this year; the bank had already postponed its first rate cut expectation to 2027 due to stronger-than-expected August employment data, and now it has added a September rate hike expectation due to the CPI.

The predictions of the four investment banks diverged significantly.

Following this round of adjustments, Wall Street's current forecasts for the Federal Reserve in the coming months have roughly fallen into four different categories:

Therefore, the August CPI brings more than just changes in whether or not interest rates will be raised in September. More importantly, Wall Street is reassessing the Federal Reserve's policy path for the coming months.

Currently, the most hawkish TD Securities predicts three consecutive rate hikes, JPMorgan Chase predicts two this year, Mitsubishi UFJ believes there may be a pause after the September rate hike, while Citigroup expects to wait until June next year to readjust its policy after the September rate hike.

The common thread is that a September rate hike is becoming the baseline scenario for an increasing number of institutions; the real divergence has shifted to whether this rate hike is a "single correction" or the start of a new rate hike cycle. The market has also significantly increased its bets on a rate hike next week, with the latest pricing at around 85%.

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