Fed rate hike bets surge as Wall Street analysts converge on September move
In a notable shift, the consensus among major U.S. financial institutions is aligning towards a Federal Reserve interest rate hike as early as this week, driven by recent inflation data and rising bond yields. Per the full note , analysts from Goldman Sachs, JP Morgan, and HSBC now foresee a 25 basis point increase in September, deviating from initial expectations for a hold. This pivot indicates a broader anxiety surrounding persistent inflation, exacerbated by upticks in oil prices and long-term yields, further suggesting that the Fed is likely to act decisively rather than risk surprising the market. As traders assess these movements, the market is now pricing in an approximately 87% probability of a hike during this FOMC meeting, which reflects a significant shift in sentiment among major players.
What the desk is arguing
The desk sees the risk of a Federal Reserve rate hike this week as increasingly likely based on the latest analyst consensus, particularly following firm CPI readings. Per the full note , Goldman Sachs, along with other major banks, has aligned its projections, with some predicting further hikes later this year as well.
This swift turnaround in expectations comes as inflation data indicates that disinflation may not be proceeding as hoped, with oil prices exceeding $100. Analysts from JP Morgan encapsulate this change, stating that strong inflation signals make a September rate adjustment "more likely than not."
Where it sits in our coverage
Our consensus target for the dollar is 1.075 with a range from 1.04 to 1.12. Key targets from major banks include: - jpmorgan: 1.10 (Mar26) - deutschebank: null - bofa: 1.04 (Mar26)
This desk's perspective aligns closely with jpmorgan's revised forecast and sits towards the higher end of the range reflecting a more hawkish outlook, especially as inflation pressures remain significant.
How other firms see it
Many firms are converging on a similar stance with Goldman Sachs and JP Morgan forecasting immediate rate hikes, while bofa takes a contrarian view suggesting a more stable rate environment. This polarization highlights the ongoing uncertainty surrounding the Fed's policy path.
The trajectory of USD/JPY could act as a bellwether for how these rate expectations are absorbed across the FX landscape, especially with upcoming economic data influencing trading strategies significantly.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01Major banks are now aligned on a September Fed rate hike, suggesting urgent inflation concerns.
- 02Market pricing for a rate hike has jumped to approximately 87%, reflecting strong trader sentiment.
- 03Rising oil prices and bond yields are key factors in shaping these expectations.
- 04HSBC notably predicts both a September and December hike, indicating a potential trend.
Market implications
Traders should closely monitor USD against its peers, particularly against the backdrop of the Fed's policy decision this week. The probability of a hike highlights potential volatility in the latter part of the week, especially around key technical levels.
Risks to this view
Any signs of cooling inflation or unexpected geopolitical developments could invalidate this bullish view on dollar strength, particularly if the Fed opts to maintain current rates despite heightened expectations.
It is getting increasingly difficult to find anyone willing to stand in the way of a Fed rate hike this week. The shift in analyst expectations has been pretty striking as we get into the new week. That especially after the US CPI report on Friday, continued tensions between US and Iran, and a further rise in long-term bond yields.
Goldman Sachs, JP Morgan, and HSBC have all moved towards a 25 bps hike in September, after previously expecting the Fed to leave rates unchanged. And for some, September is no longer looking like a one-and-done move. HSBC now expects the Fed to raise interest rates by 25 bps in both September and December.
Meanwhile, JPMorgan has made the same change in bringing forward a hike it had previously only expected in December. Goldman Sachs is a little less aggressive, pencilling in a 25 bps move this week after previously forecasting no change. But perhaps the more interesting part of its argument is less about the inflation data itself and more about what markets are already expecting. "We think that the FOMC will be reluctant to surprise", Goldman economist David Mericle said.
That matters when markets are now pricing around an 87% chance of a rate hike. Once expectations get that far along, holding rates steady becomes a much bigger policy signal than it otherwise would be. Taking a step back, the latest market developments are also a key reason as to why the consensus has shifted so quickly.
Inflation readings last week came in firm enough to raise doubts over whether the disinflation trend is really continuing, while oil prices have pushed back above $100 and Treasury yields remain around multi-year highs. JP Morgan economists summed up the change as a week of rising bond yields, higher energy prices and inflation data strong enough to make a September hike "more likely than not". And the hawkish shift is beginning to extend further down the road.
Deutsche Bank already expects hikes in September and December and is now adding another 25 bps move in March 2027 to its forecast. That is probably the bigger story heading into Wednesday. A September hike is rapidly becoming the consensus call.
The more important question for markets may be whether the Fed treats it as an insurance move against inflation, or the beginning of another tightening sequence. This article was written by Justin Low at investinglive.com.
Sources & References
How we cover this story