Why StanChart Won't Capitulate on Fed Rate Hike

A report released by Standard Chartered on September 14 clearly judges that the Federal Reserve will keep interest rates unchanged at the September 15-16, 2025 FOMC meeting (rate decision announced early Thursday Beijing time). In the bank's view, a rate hike now remains "the wrong policy choice," and it would be more reasonable to wait for tariff shocks and recent data revisions to fade before judging whether inflation is forming a trend.

The problem is that the market has already priced in a fairly aggressive outcome. Fed funds futures currently price an 88% probability of a 25 basis point rate hike in September. If the Fed stands pat, the rates market could see a significant repricing, and the dollar could weaken temporarily. Conversely, if the Fed delivers a hike, the market could further reinforce hawkish expectations. Standard Chartered believes that Christopher Waller's credibility could play a stabilizing role in this scenario and support the dollar and the long end of the Treasury curve.

Therefore, the trading focus of the September meeting is not just the rate decision itself, but how the Fed will communicate the subsequent policy path to the market, especially whether Waller can re-anchor market expectations.

Inflation Pressures May Be Overstated, Tariff Shock Is Fading

The report argues that current core inflation may be overstated. Tariffs have indeed pushed up core PCE, but the magnitude and duration of the impact remain highly uncertain, and comprehensive GDP revisions could also change the market's assessment of economic and inflation trends. Before the data stabilizes, the Fed has no need to rush into a rate hike.

The supercore inflation tracked by the bank has recently declined markedly and returned to the normal range of the 2010s. The report believes that current CPI pressure comes more from goods prices, with tariffs being an important driver, but this does not mean that persistent inflationary pressure has formed within the economy.

Chained core CPI and core PCE have long been highly synchronized, but have recently diverged significantly. The report notes that chained CPI better reflects actual consumer spending, and its recent trend deserves policymakers' attention.

In addition, multiple analyses within the Fed suggest that tariffs may contribute about 0.7 percentage points to PCE inflation. As tariff revenue peaks in the fourth quarter of 2025, its inflationary impact may gradually weaken in the following months. In other words, we may now be in the window where the tariff inflation shock is beginning to fade.

From a risk management perspective, waiting for data confirmation does not close off the option of a rate hike. If subsequent data confirm that inflation is reaccelerating, the Fed could still hike by 50 basis points at once; conversely, if it hikes too early and is then forced to reverse, it could damage policy credibility.

88% Hike Pricing Heats Up, Waller Faces Policy Feedback Risk

Although Standard Chartered judges that the Fed should not hike in September, the market has clearly turned hawkish. Fed funds futures price an 88% probability of a 25 basis point hike in September, and expect a cumulative hike of about 74 basis points by next March. This rise in expectations has been driven largely by Waller's Jackson Hole Economic Symposium speech.

But the report points out that the market may have only captured the hawkish parts of Waller's speech. On one hand, Waller emphasized the importance of inflation returning to target; on the other hand, he noted that policymakers must judge whether underlying inflation is rising, falling, or stagnating, rather than making judgments based on a single data point.

Waller also warned that if the market relies on Fed guidance, and the Fed in turn relies on market prices, policymakers could overlook new economic developments and increase the risk of policy mistakes.

In Standard Chartered's view, this risk is being amplified. The higher the rate hike expectations, the stronger the constraint that market pricing imposes on policy, and the more susceptible the Fed becomes to existing expectations, creating a feedback loop of "market expectations driving policy, and policy reinforcing market expectations."

Therefore, if the Fed ultimately stands pat in September, what will really matter is how Waller handles the already elevated rate hike expectations: he must explain why no hike is needed now, and also prove that the Fed will not be dictated by market pricing.

Vote Count Logic Also Does Not Support a September Hike

The voting structure is also an important basis for Standard Chartered's judgment. At the July FOMC meeting, three members already supported a rate hike. To actually achieve a hike in September, at least four members who originally leaned toward standing pat would need to switch sides to reach the seven-vote threshold.

Standard Chartered believes that Waller's most likely strategy is to avoid being in the minority, but he will not actively push for a hike. If four more members switch, he may join the hiking camp; if only three switch, Waller may vote for a hike to avoid a 6-6 tie; if only two switch, he still has room to support standing pat.

The key is whether the data since the July meeting is sufficient to push at least three "stand pat" members to change their stance. Standard Chartered believes that current data is not yet sufficient to meet this condition.

The Real Test Is Waller's Press Conference

The report expects that the FOMC statement will not undergo major adjustments. On the Summary of Economic Projections (SEP), the dot plot may not turn significantly hawkish, but compared with June, the room for rate cuts may narrow further, and the weighted average rate dots may shift upward.

If the Fed ultimately stands pat, Waller will face a greater test at the press conference: he must explain why no hike is needed now, and also explain how the Fed will view the high rate hike expectations already formed in the market.

The market is especially likely to question whether the October meeting still retains the possibility of a hike. Waller will most likely emphasize that "each meeting is decided based on data," but if there is no clearer policy trigger condition, market doubts about his stance may persist.

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