Preview of the Fed's September Interest Rate Meeting: An Unquestioned Rate Hike and a Future Full of Uncertainties
Hello everyone, I'm your financial journalist.
At 2 a.m. Beijing time on Thursday, the eyes of the global market will be on Washington as the Federal Reserve (the central bank of the United States) is about to hold its September interest rate meeting. For most people, this might just be a string of numbers in the news; but for the global economy, your mortgage rates, and even the prices in the supermarket, this meeting could be a pivotal turning point.
Today, I won't overwhelm you with technical jargon. Let's break down this news in plain language. Here's the key takeaway: The Fed is very likely to raise interest rates, and there's a lot of disagreement within the committee; Chairman Jerome Powell's vote will determine the final outcome. More importantly, this rate hike might not be the end, but the beginning of a new round of tightening measures.
Let's delve into this "financial drama" in five aspects:
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1. Why is a rate hike almost a sure thing this time?
If you've been following the news recently, you've probably noticed a term that's been mentioned repeatedly: inflation.
Although some summer data looked decent, Fed Chairman Kevin Warsh said something quite blunt at the Jackson Hole Symposium at the end of August: "The progress over the past two years has been limited, and inflation hasn't really improved." This statement was like a bombshell that woke up the market.
The current situation is as follows:
- High oil prices: Crude oil is priced at $100 per barrel, and diesel prices have reached record levels. Diesel is the "blood" of the economy; it's essential for transporting goods, farming, and heating. When diesel gets more expensive, the cost of transporting everything increases, which ultimately reflects in the prices of the bread you buy and the clothes you wear.
- Data doesn't support a complacent attitude: Warsh wants to see inflation clearly and quickly drop back to the 2% target. However, the latest data shows that inflation hasn't decreased and is even on the rise.
Against this backdrop, the interest rate market (where traders make decisions with real money) has already given its answer: The probability of a rate hike this week is nearly 90%. In the financial world, a probability of over 90% usually means there's little doubt. So, unless something extremely unlikely happens, the Fed is likely to raise rates.
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2. Fierce internal debate at the Fed: 12 members, 12 different opinions?
The most interesting aspect of this meeting is not whether a rate hike will happen, but how it will be implemented and who will oppose it.
The Fed's decision-making body is the Federal Open Market Committee (FOMC), which consists of 12 members. The disagreement this time is even greater than it was in July, to the point where Chairman Powell's vote could determine the outcome. This means that if Powell doesn't vote in favor of a hike, or if someone strongly opposes it, the outcome could be very contentious.
We can roughly divide the 12 members into two camps:
- The Hawks (favors raising rates, believing inflation is too dangerous):
- James Bullard (Cleveland Fed): Is calling for an immediate 25-basis-point hike to curb inflation.
- Narayana Kocherlakshmi (Minneapolis Fed): Worries about supply shocks from energy and tariffs, arguing that inflation is "sticky" and won't come down easily.
- Robert Kaplan (Dallas Fed): Focuses on core service inflation (such as rent and healthcare) and believes higher rates are needed to curb demand.
- Three other members who could shift their stance: Christopher Bollard, Charles Evans, and Esther Lash. They were previously more cautious, but their attitudes have hardened due to rising oil prices and rebounding inflation data. In particular, Bollard has mentioned that if the situation in the Middle East continues to be unstable, she would reconsider the risks and lean towards raising rates.
- The Doves (advocates caution or waiting):
Although the news mainly focuses on the Hawks, it implies that some members believe the economy has been hit hard enough or think inflation will naturally decline and doesn't require such immediate action.
The key point: As chairman, Powell's position is very firm. He repeatedly emphasizes that stabilizing prices is the top priority. If six of the other eleven members want to raise rates and six don't, Powell's vote will be the deciding factor.
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3. The "mystery" in the Fed's interest rate forecast: How many more hikes are ahead?
Besides whether a rate hike will happen this week, what people are more concerned about is: How many more hikes will there be in the future?
The Fed releases an Economic Projection Summary (SEP) after each meeting, which includes a famous chart called the interest rate forecast (dot plot). Each member draws a dot on the chart indicating their expected interest rate levels by the end of the year. This chart serves as the Fed's official guide for the future.
Changes in this dot plot might be even more concerning for the market than the rate hike itself:
- Base expectation: Another hike this year, or possibly more.
- Deutsche Bank predicts that the Fed will raise rates by a total of 75 basis points this year (three times: September, December, and next March). If data continues to worsen, a hike in October is also possible.
- JPMorgan Chase, UBS, and other institutions expect the median interest rate by the end of the year to be 4.00%, meaning two hikes this year.
- Bank of America and HSBC are even more hawkish, predicting a median interest rate of 4.185% and leaving the door open for three hikes this year.
- Why is the dot plot shifting to the right (toward a more hawkish stance)?
- Rising oil prices have increased inflation expectations.
- The job market is improving, indicating the economy is not in a slump, giving the Fed the confidence to tighten policy.
- Powell doesn't want the market to think inflation is tolerable; he uses the dot plot to signal to the market: Don't get too excited; the tightening just begins.
- Dove views:
- Goldman Sachs is relatively cautious, suggesting that the high inflation in August was due to one-time factors (tariffs, energy), and the core inflation trend is still slowing, so it expects only one hike this year (in September), with a median interest rate of 3.875% by the end of the year.
Interpretation: If the dot plot shows another hike this year, the market will expect interest rates to remain high for a longer period next year. This is bad news for the stock and bond markets because money becomes more expensive, increasing the cost of borrowing.
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4. Political pressure vs. central bank credibility: Powell's dilemma
There's a very delicate political context: President Donald Trump has been pressing the Fed to cut rates.
Trump wants low interest rates because they stimulate the economy, reduce government debt costs, and boost the stock market. However, Fed Chairman Powell is a "technocratic bureaucrat" who places more emphasis on inflation data.
This creates a huge conflict:
- If Powell raises rates: Trump will be unhappy and may criticize the Fed for being "unaware of politics" or "damaging the economy."
- If Powell doesn't raise rates (or delays): Economists at JPMorgan Chase warn that if Powell says "inflation cannot be tolerated" but doesn't take action, the Fed's credibility will be damaged. Once the market thinks the Fed is weak, inflation expectations could get out of control, and it will be more difficult to control inflation later on.
One market speculation: Some analysts think Powell might adopt a "delay tactic." He could raise rates in September but deliberately avoid giving clear guidance (for example, not saying "how many more hikes there will be next year"), leaving the decision to future data. Some even suggest he might wait until after the mid-term elections in November to avoid putting too much pressure on the market or offending Trump.
Wells Fargo's view is more balanced: Powell has opened the door for a rate hike but left room for flexibility. In other words, a hike is very likely; the exact amount and timing will depend on the situation.
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5. What does this mean for ordinary people?
Finally, let's focus on you and me. What does the Fed's decision really mean for us?
- Your mortgage and car loans: Although the Fed's rates don't directly determine your mortgage rates, they affect the benchmark interest rates in the entire financial market. If the Fed continues to raise rates, global funding costs will increase, potentially raising your loan interest rates or making it harder to get favorable loan terms for new loans.
- Your savings and investments: Higher interest rates usually mean higher deposit rates. If you have spare money, saving for a fixed period might be more profitable now. However, if the economy slows due to the rate hikes, the stock market could decline, and your stock funds could lose value.
- Inflation: The Fed's goal is to lower inflation. If the rate hikes are successful, your purchasing power will be relatively stable in the future. But if the hikes are too aggressive and lead to an economic recession and higher unemployment, your income could be affected.
- Global market fluctuations: The dollar is the international currency. When the Fed raises rates, the dollar typically appreciates, causing other countries' currencies to depreciate and making imported goods more expensive. This could be good for export-oriented companies but bad for those that rely on imported raw materials.
In summary: A rate hike by the Fed this time is almost a certainty. But the real focus is on the dot plot and Powell's speech. If the dot plot indicates more hikes in the future or if Powell's tone is very firm, the global market could experience significant volatility.
For ordinary people, now is not the time to be blindly optimistic. Maintaining sufficient cash flow, investing carefully, and keeping an eye on price changes is the best way to cope with these uncertainties.
At 2 a.m. Beijing time on Thursday, the answer will be revealed. Let's wait and see.