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Fed rate-hike expectations and the case for holding steady

A September 15 post says central bank watchers overwhelmingly expect a hike that week and another by year-end. Another argues that cooling core inflation supports holding rates steady.

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4 Sources, 15d ago, first seen 15d ago

TLDR

A September 15 post says central bank watchers overwhelmingly expect a Fed rate hike that week and a second before the end of 2026. A September 16 trading post lists the decision for 2 p.m. ET that day and forecasts an increase from 3.50%–3.75% to 3.75%–4.00%, followed by a press conference at 2:30 p.m.

The case against a hike comes from a separate post recounting a CNBC appearance. Its author argues that core inflation is easing and that raising rates as inflation declines, after holding in June and July, could undermine the Fed’s credibility.

Combined views

1.2M

4 Sources, first seen 15d ago

4.5K likes493 comments901 saves822 reposts

Combined views

1.2M

4 Sources, first seen 15d ago

4.5K likes493 comments901 saves822 reposts

Sentiment

Positive27.7%72.3%Negative

Summary

Replies largely criticized claims that recent core CPI and PCE data support not hiking rates, arguing the Fed lacks credibility after years of above-target inflation, while fewer accounts voiced agreement.

Based on 110 sentiment-bearing replies from 101 accounts across 2 conversations.

Sentiment

Positive27.7%72.3%Negative

Summary

Replies largely criticized claims that recent core CPI and PCE data support not hiking rates, arguing the Fed lacks credibility after years of above-target inflation, while fewer accounts voiced agreement.

Based on 110 sentiment-bearing replies from 101 accounts across 2 conversations.

4 Sources

@NickTimiraosCentral bank watchers now overwhelmingly expect not only a Fed rate increase this week, but a second hike before the end of the year
@SteveMiranI argued on CNBC this morning that: 1. The data have been consistent with not hiking rates. Core CPI came in at the lowest level since March 2021, and core PCE is about to be revised and brought closer in line with the less error-prone CPI levels. We are getting the evidence we need that the spring was consistent with a one-off energy shock, as core PCE moving averages slope down and come in line with a forecast to be back at target in the period after monetary policy lags, i.e. in about a year. We know from Trichet that hiking into an oil shock doesn't lead to the best outcomes. 2. If you held in June and July and become more hawkish as the inflation data come down, it speaks to an incoherent reaction function. The market needs to believe there is an economic framework underlying monetary policy decisions and they are not being made randomly. Typically, a central bank becomes more dovish as inflation data and forecasts come down, not more hawkish. If the Fed hikes, when the dust settles, I think this will speak to a larger credibility problem as the reaction function will appear closer to randomness than to a mapping from inflation data to policy outcomes. This would entail the need to specify why hiking was consistent with declining inflation data in an economically coherent framework, which to date has not been done. 3. The oft-repeated argument that the Fed needs to hike "to control the long end" is problematic. The premise is invalid: with term premia and inflation expectations well behaved, the move higher in long yields has been a result of improved growth expectations, i.e. a good increase in yields rather than a bad increase in yields, and not one that needs to be fought (other than in the sense of smoothing volatility as Treasury is doing through buyback liquidity). Moreover, even if one views "controlling the long end" as a valid goal for monetary policy, hiking in this environment will be counterproductive as a) an increase in short-term funding costs is only going to be passed through and raise long yields given the shifting buyer base for Treasurys; b) history doesn't really show that long yields come down with Fed hikes; and c) the incoherence of the reaction function will, when the dust settles and after initial reactions, lead to higher and not lower risk premia. 4. What, then, is the argument for hiking? Atmospherics. Market pricing and not wanting to cause additional volatility given market pricing. With well-anchored inflation expectations and the inflation data on the right path, credibility isn't really at risk here. The argument "inflation has been high for x months" is backward-looking. Given monetary policy lags, policy has to be set for Q4 of 2027 and Q1 of 2028. Setting policy based on what happened in 2023 or 2024 or even 2026 is the type of thing Milton Friedman's "fool in the shower" would do.
@cryptoroverFED Rate Decision today! Will it be a Lamborghini or McDonald’s?
@eliz883Good morning, traders. Crypto Twitter is going through a phase of pure rage because too many people still can’t manage their emotions or maintain discipline. But that’s fine—let them vent while we focus on ourselves. It’s FOMC Day, so expect another highly volatile session. No rush, controlled position sizing, and no trades without a clear trigger. Protecting capital always comes first.
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    4 Sources

    @NickTimiraosCentral bank watchers now overwhelmingly expect not only a Fed rate increase this week, but a second hike before the end of the year
    @SteveMiranI argued on CNBC this morning that: 1. The data have been consistent with not hiking rates. Core CPI came in at the lowest level since March 2021, and core PCE is about to be revised and brought closer in line with the less error-prone CPI levels. We are getting the evidence we need that the spring was consistent with a one-off energy shock, as core PCE moving averages slope down and come in line with a forecast to be back at target in the period after monetary policy lags, i.e. in about a year. We know from Trichet that hiking into an oil shock doesn't lead to the best outcomes. 2. If you held in June and July and become more hawkish as the inflation data come down, it speaks to an incoherent reaction function. The market needs to believe there is an economic framework underlying monetary policy decisions and they are not being made randomly. Typically, a central bank becomes more dovish as inflation data and forecasts come down, not more hawkish. If the Fed hikes, when the dust settles, I think this will speak to a larger credibility problem as the reaction function will appear closer to randomness than to a mapping from inflation data to policy outcomes. This would entail the need to specify why hiking was consistent with declining inflation data in an economically coherent framework, which to date has not been done. 3. The oft-repeated argument that the Fed needs to hike "to control the long end" is problematic. The premise is invalid: with term premia and inflation expectations well behaved, the move higher in long yields has been a result of improved growth expectations, i.e. a good increase in yields rather than a bad increase in yields, and not one that needs to be fought (other than in the sense of smoothing volatility as Treasury is doing through buyback liquidity). Moreover, even if one views "controlling the long end" as a valid goal for monetary policy, hiking in this environment will be counterproductive as a) an increase in short-term funding costs is only going to be passed through and raise long yields given the shifting buyer base for Treasurys; b) history doesn't really show that long yields come down with Fed hikes; and c) the incoherence of the reaction function will, when the dust settles and after initial reactions, lead to higher and not lower risk premia. 4. What, then, is the argument for hiking? Atmospherics. Market pricing and not wanting to cause additional volatility given market pricing. With well-anchored inflation expectations and the inflation data on the right path, credibility isn't really at risk here. The argument "inflation has been high for x months" is backward-looking. Given monetary policy lags, policy has to be set for Q4 of 2027 and Q1 of 2028. Setting policy based on what happened in 2023 or 2024 or even 2026 is the type of thing Milton Friedman's "fool in the shower" would do.
    @cryptoroverFED Rate Decision today! Will it be a Lamborghini or McDonald’s?
    @eliz883Good morning, traders. Crypto Twitter is going through a phase of pure rage because too many people still can’t manage their emotions or maintain discipline. But that’s fine—let them vent while we focus on ourselves. It’s FOMC Day, so expect another highly volatile session. No rush, controlled position sizing, and no trades without a clear trigger. Protecting capital always comes first.
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