Fomc preview fed set to hike 25bp in recalibration move

Key arguments

• Warsh's Jackson Hole emphasis on inflation above target for five and a half years and on non-tight financial conditions shifted the Fed's reaction function to hiking unless data justify a pause.
• The August jobs report beat every Bloomberg survey forecast and core CPI at 0.29% MoM is nearly double the 0.17% trend pace needed to converge on 2%, supporting a hike.
• Business surveys hint at summer re-acceleration and Middle East shipping disruption has pushed oil above $100/bbl, adding to the case, while no FOMC member is openly hostile and Treasury Secretary Bessent likely favours a hike.
• Despite markets pricing two and a half further hikes, ING sees a one-and-done move, drawing parallels with the March 1997 risk-management hike under Greenspan rather than the start of a cycle.
• The 2yr carry spread at 90bp (above the 75bp threshold at which markets effectively signal readiness) and the 10yr yield near 4.9% and likely to test 5% argue the Fed should take a controlling influence.
• A 25bp hike should support dollar credibility, though ING still favours EUR/USD toward 1.1500, sees USD/JPY correction risk to 157/158 and expects the DXY to decline through 2027.

Corresponding source evidence

1. He emphasised a focus on inflation, which has been above target for five and a half years, and a sense that financial conditions aren’t tight in an environment of full employment.
2. Previously, it was that the Fed would hold unless the data justified a hike.
3. August’s jobs report came in hotter than anyone forecast in Bloomberg’s survey of economists and the August CPI report showed headline inflation remains above target at 3.4% while core CPI rose 0.29% month-on-month, nearly double the 0.17% trend rate needed to bring annual inflation down to the 2% target.