With a near consensus that the Federal Reserve will raise interest rates on Thursday, why is Standard Chartered refusing to "surrender"?

With the Federal Reserve's September meeting just around the corner, the market is holding its breath, awaiting the policy direction.

A report released by Standard Chartered Bank on September 14th clearly predicted that the Federal Reserve would maintain interest rates unchanged at its FOMC meeting on September 15-16 (the interest rate decision will be announced early Thursday morning Beijing time). In the bank's view, raising interest rates now is still a "wrong policy choice," and a more reasonable approach would be to wait for the impact of tariffs and recent data revisions to subside before judging whether inflation has formed a trend.

The problem is that the market has already bet quite aggressively. Federal funds futures are currently pricing in an 88% probability of a 25 basis point rate hike in September. If the Fed holds rates steady, the interest rate market could see a significant repricing, and the dollar could weaken temporarily. Conversely, if the Fed does raise rates, the market could further reinforce hawkish expectations. Standard Chartered believes that Warsh's credibility could play a stabilizing role in this scenario, supporting the dollar and long-term US Treasury bonds.

Therefore, the focus of the September meeting will not only be on the interest rate decision itself, but also on how the Federal Reserve will communicate its subsequent policy path to the market, especially whether Warsh can re-anchor market expectations.

Inflationary pressures may be overestimated, and the impact of tariffs is waning.

The report argues that current core inflation may be overestimated. While tariffs have indeed pushed up core PCE, the magnitude and duration of this impact remain highly uncertain, and revised GDP figures could alter market perceptions of economic and inflation trends. Until the data stabilizes, the Federal Reserve has no need to rush into raising interest rates.

The bank's tracked supercore CPI has recently fallen significantly, returning to the normal range of the 2010s. The report believes that current CPI pressure comes more from commodity prices, with tariffs being a major driver, but this does not mean that sustained inflationary pressure has formed within the economy.

The core CPI and core PCE, which had historically been highly correlated, have recently shown a significant divergence. The report points out that the core CPI is a better reflection of actual consumer spending, and its recent trend warrants attention from policymakers.

Furthermore, multiple analyses within the Federal Reserve suggest that tariffs may contribute approximately 0.7 percentage points to PCE inflation. With tariff revenues expected to peak in the fourth quarter of 2025, their inflationary impact is likely to gradually diminish over the next few months. In other words, we may currently be in a window where the inflationary impact of tariffs is beginning to recede.

From a risk management perspective, waiting for data confirmation does not close the door on raising interest rates. If subsequent data confirms that inflation has rebounded, the Federal Reserve can still raise interest rates by 50 basis points at once; conversely, if it raises rates too early and is then forced to reverse course, it could damage the credibility of its policy.

With 88% of interest rate hikes being priced in, Warsh faces the risk of policy feedback.

Despite Standard Chartered's assessment that a September rate hike is unlikely, the market has clearly shifted to a hawkish stance. Federal funds futures are pricing in an 88% probability of a 25 basis point rate hike in September, and project a cumulative increase of approximately 74 basis points by March of next year. This rising expectation is largely driven by Warsh's Jackson Hole speech.

However, the report points out that the market may have only captured the hawkish aspects of Warsh's speech. While emphasizing the importance of inflation returning to target, Warsh also pointed out that policymakers must determine whether underlying inflation is rising, falling, or stagnating, rather than making judgments based solely on a single data point.

Warsh also warned that if markets rely on Federal Reserve guidance, and the Fed, in turn, relies on market prices, policymakers may overlook new economic developments, increasing the risk of policy mistakes.

Standard Chartered believes this risk is being amplified. The higher the expectation of interest rate hikes, the stronger the market's pricing will exert a counter-constraint on policy, and the more easily the Federal Reserve will be influenced by existing expectations, thus forming a feedback loop of "market expectations driving policy, and policy reinforcing market expectations."

Therefore, if the Fed ultimately holds rates steady in September, the real focus will be on how Warsh handles the already high expectations for a rate hike: he needs to explain why a rate hike is unnecessary at this time, and also prove that the Fed will not be dictated by market pricing.

The logic of vote counts also does not support a September rate hike.

The voting structure is also an important basis for Standard Chartered's judgment. In July, three members of the FOMC supported raising interest rates. If a rate hike is to actually be implemented in September, at least four more members who originally preferred to hold rates steady need to change their minds to reach the seven-vote threshold.

Standard Chartered believes that Warsh's most likely strategy is to avoid becoming a minority, but he will not actively push for a rate hike. If four more committee members switch sides, he may join the rate hike camp; if only three switch sides, Warsh may vote in favor of a rate hike to avoid a 6-6 tie; if only two switch sides, he will still have room to support keeping rates unchanged.

The key question is whether the data since the July meeting is sufficient to persuade at least three "wait-and-see" politicians to change their stance. Standard Chartered believes that the current data is insufficient to meet this condition.

The real test came at the Walsh press conference.

The report anticipates no significant changes to the FOMC statement. Regarding the SEP (Securities and Benefits) program, the dot plot is unlikely to shift significantly hawkish, but compared to June, the scope for rate cuts may narrow further, and the weighted average interest rate may rise slightly.

If the Fed ultimately holds rates steady, Warsh will face a greater test at the press conference: he will have to explain why there is no need to raise rates at present, and also how the Fed will view the high rate hike expectations that have already formed in the market.

The market is particularly likely to scrutinize whether a rate hike will remain a possibility at the October meeting. Warsh will most likely emphasize that "each meeting is based on data," but without clearer policy triggers, market doubts about his stance may persist.

Therefore, the impact of the September FOMC meeting depends not only on the interest rate decision itself, but also on whether Warsh can effectively guide subsequent expectations. For the US dollar and long-term US Treasury bonds, the key variable after the meeting will be how the market reprices the future interest rate path.

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