As of September 15-16, the Federal Reserve's Federal Open Market Committee (FOMC) is set to convene for its scheduled policy meeting. Following five consecutive holds, market anticipation has reached unprecedented levels regarding whether the Fed will resume its tightening path this month. According to the CME FedWatch Tool, market-implied probability for a September hike has swung dramatically in just a few weeks—from roughly 35% before the Jackson Hole symposium, to nearly 60% after Fed Chair Walsh's hawkish remarks there, and then to almost 90% following the release of August inflation data. Expectations for tighter policy continue to intensify.

Beyond the headline rate decision, several critical aspects deserve attention at this meeting.

Internal Divergence Emerged in July; Recent Stances Remain Divided

Reviewing the July meeting: despite holding rates steady, the vote was 9-3, with three regional Fed presidents dissenting in favor of a hike. This marked the first time since 2016 that three dissenting votes with identical direction appeared in a single policy decision, highlighting growing support for tighter policy within the Fed. The July minutes further revealed the depth of internal division, with many participants explicitly stating that further tightening might be necessary if inflation fails to decline.

Looking at recent public comments from Fed officials, while hawkish and dovish stances differ, the divergence largely centers on the timing of action. On the hawkish side, Fed Chair Walsh delivered a clear hawkish signal at Jackson Hole, stating that if inflation does not continue to decline at a "satisfactory pace," further rate hikes would become a more likely policy option. Cleveland Fed President Hammack has repeatedly reaffirmed her preference for raising the benchmark rate now and questioned the sustainability of recent disinflationary signs. On the dovish side, Fed Governor Waller indicated that if August inflation data continued its downward trend, he would lean toward maintaining rates, but he did not close the door on hikes—emphasizing that if inflation rebounds or disinflation reverses, he would consider modest increases even without a significant surge. New York Fed President Williams struck a cautious tone, stating there is no clear evidence yet whether current policy is sufficient to bring inflation back to the 2% target over the next year or two, or whether further action is needed. He also cautioned against judging based on one or two months of data, advocating a comprehensive assessment of all economic information. Such "conditional" dovish stances could fuel internal disagreements over the timing of policy action, warranting attention to the specific vote outcome.

Beyond the Rate Decision: Key Areas to Monitor

With the market having largely priced in a September hike, much of what matters at this meeting extends beyond the single decision itself.

First, Fed Chair Walsh faces a "dilemma." His Jackson Hole speech served as the catalyst for the recent surge in rate-hike expectations, making this meeting not only a policy choice for him but also a critical window for establishing policy credibility. If he chooses to hold steady despite supportive employment and inflation data, the Fed's credibility and policy framework could face market challenges and skepticism. Recent signals from the Treasury market are telling, with long-end yields continuing to climb. Should market doubts emerge over the Fed's commitment to fighting inflation, credibility erosion could demand higher term premiums, potentially driving further selling in long-dated Treasuries and pushing yields higher.

On the other hand, with midterm elections approaching, the White House has been pressuring the Fed frequently, hoping to leverage monetary easing to boost short-term economic confidence. Recently, core White House officials have nearly all weighed in, signaling that the Fed should not hike in September—or even consider cuts. Whether the Fed can maintain its independence amid repeated intervention is another key point to watch. Notably, former President Trump has claimed high rates place the U.S. in a very unfair position.

Second, the future policy path matters more than the single meeting outcome. The June dot plot revised the median rate expectation for end-2026 upward from 3.4% in March to 3.8%, triggering a typical tightening trade—dollar and short-end yields rose, while gold and risk assets fell. The September dot plot will likely serve as the core basis for market pricing of the future rate path. If the Fed hikes in September but the dot plot is not revised upward, the market may view this as a "one-off adjustment" rather than the start of a tightening cycle. However, if the hike is accompanied by a further upward revision in the median dot plot, markets could reprice a "higher for longer" rate environment. Notably, since the Fed adopted the federal funds rate as its primary tool for influencing borrowing costs in the 1990s, there has been only one instance—in 1997—where a rate hike was followed by an immediate end to the tightening cycle.

Third, how the policy statement interprets the action compared to July warrants scrutiny. The FOMC statement is typically a brief, highly standardized official document that may include: the policy decision itself, economic assessment, policy rationale, and voting results with dissents. For September, watch for these potential changes: (1) Policy rationale—if the Fed hikes, whether the statement explains the action could offer clues for the future rate path; (2) Inflation language—the July statement mentioned inflation "remains elevated," and Walsh has recently said there is still much work to do on inflation. Watch for any wording changes, while also monitoring whether the statement retains or strengthens the July reference to economic uncertainty stemming from Middle East conflicts, given renewed geopolitical tensions; (3) Voting divergence—the statement's ending discloses specific votes, offering direct insight into the degree of internal disagreement. The three unanimous dissents in July showed growing divergence, and current signals suggest continued intense hawk-dove dynamics; watch whether the divide persists in September.

What Factors Will Shape the Future Path?

Since expectations for the future rate path are a focal point, several factors warrant monitoring:

1. The sustainability and breadth of inflation remain the core variable: Walsh has explicitly stated that better-than-expected monthly inflation readings over the past two months are "not yet sufficient to indicate a substantial improvement in the inflation trend." If subsequent data show price increases spreading from energy to broader goods and services, inflation could become stickier, potentially affecting longer-term rate path expectations.

2. Labor market strength: August nonfarm payrolls were solid. If employment data continue to show strength with unemployment remaining low, the Fed's tightening stance could be well-supported.

3. AI capital expenditure's demand pull: The Fed has begun incorporating structural variables like AI into its longer-term macro analysis framework. The AI narrative could significantly influence future monetary policy. Current massive AI capital spending continues to support demand. If AI infrastructure development persistently drives related industry demand expansion and keeps the U.S. economy robust, the rate path could move higher.

4. Middle East tensions and energy prices: Middle East conflicts driving higher energy prices represent a core external driver of current inflation. Whether geopolitical tensions persist, keeping oil prices elevated, and whether energy supply shocks evolve into broader price pressures are key factors the Fed will weigh in considering the future rate path.

Potential Short-Term Volatility Risks for Assets Around the Decision

Asset volatility around the decision will likely hinge significantly on the dot plot scenario.

Scenario 1: A 25bp hike in September with the median dot plot unchanged from June. The current federal funds rate target range stands at 3.50%-3.75%, and the June dot plot revised the median expectation for end-2026 to 3.8%, suggesting most officials anticipated one hike this year. If September delivers a 25bp hike but the median dot plot remains flat, the market may interpret this as a "one-off adjustment" rather than the start of a tightening cycle. For Treasuries, short-end yields could react and rise modestly, but an unchanged longer-term path might alleviate upward pressure on long-end yields. For the dollar, watch for "buy the rumor, sell the fact" dynamics—if the dot plot is not revised upward, dollar upside could be limited. For gold, short-term sentiment swings may occur post-decision, but if rate-hike expectations remain contained, downside pressure could be manageable.

Scenario 2: A 25bp hike accompanied by an upward revision in the median dot plot. Hiking while signaling further increases would be a relatively hawkish signal, potentially prompting markets to reprice a "higher for longer" environment. Treasuries could see yields rise across maturities, with short-end yields more pronounced on hike expectations. The dollar could strengthen further on an elevated rate path. Gold, as a non-yielding asset, could face pressure as opportunity costs rise with higher hike expectations.

Scenario 3: No hike in September—the dot plot guidance becomes even more critical. If the Fed holds, the dot plot will indicate whether the pause reflects a "delay" or a "shift in stance." If the median dot plot remains unchanged, it still points to action within the year, potentially widening short-term market divergence—warranting close attention to the statement and press conference for further guidance. If the median dot plot is revised upward, expectations could concentrate on the October and December meetings, exerting more direct upward pressure on short-end yields; a higher rate path could boost the dollar and pressure gold.

Of course, these scenarios are for reference only. While the dot plot is an important guide to the future path, attention should also be paid to the policy statement, press conference, and short-term market sentiment shifts. Caution is advised regarding short-term asset volatility and risk management.

Risk Management Around the Decision

FOMC meetings typically coincide with a concentrated release of volatility. Investors should pay special attention to single-direction positions and implement robust risk controls.

1. Avoid one-sided "betting": After the CPI release, gold and Treasury yields briefly moved counter to "textbook" patterns, exhibiting a "selling the fact" dynamic. Post-meeting, significant short-term sentiment swings are possible. Any one-sided wager carries elevated risk; investors should avoid overexposure to directional positions around the FOMC decision.

2. Watch for dot plot "surprises": The September dot plot carries substantial uncertainty. If more officials support multiple hikes, it could trigger a repricing of the rate environment.

3. Interpretation of the rate decision: Beyond the outcome itself, attention should focus on how the statement, press conference, and minutes interpret the decision's logic and economic conditions. Markets will seek "clues" from this interpretation to base investment decisions, potentially triggering short-term volatility.

Nearly every FOMC meeting draws intense market attention, but at these critical junctures, implementing risk controls ahead of predicting outcomes is more important. Opportunities in the market are always present, but blind speculation and trading can expose us to risks far greater than the opportunities. It is prudent to approach each "major event" rationally and make well-considered decisions after thorough and comprehensive assessment.

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