September FOMC Preview

A Fed Divided Over Inflation and the Next Move

The September FOMC meeting is shaping up to be an important test of how the Federal Reserve views inflation and the appropriate path for interest rates.

Markets are increasingly positioned for a 25bp rate hike, taking the federal funds target range from 3.50% - 3.75% to 3.75% - 4.00%. The bigger question is what comes next: another increase later this year, or a pause as the Fed assesses the impact of tighter financial conditions.

The debate is particularly important because policymakers differ on how much weight to place on recent inflation improvement versus the risk that inflation remains above target for longer.

Inflation Remains the Central Policy Issue

Inflation is still above the Fed's 2% objective, while the recent rise in energy prices has added another layer of uncertainty.

Core CPI increased 0.22% month-on-month in July and 0.29% in August, while August core PCE is estimated at around 0.25% month-on-month.

The key disagreement is not whether inflation is elevated, but how quickly it is moving toward 2%.

Kevin Warsh has emphasized that the Fed cannot assume inflation will return to target without clearer evidence of sustained progress. His Jackson Hole remarks placed particular emphasis on maintaining credibility around the 2% objective.

Christopher Waller, in contrast, has focused more on the recent inflation trend. In his September remarks, he said continued disinflation could justify keeping rates unchanged, while a renewed acceleration in inflation would strengthen the case for a hike.

This difference in emphasis captures the policy debate going into September.

The Hawkish and Dovish Divide

The July meeting highlighted the growing differences within the Committee. Beth Hammack, Neel Kashkari and Lorie Logan dissented in favour of a 25bp hike when the Fed decided to hold rates unchanged.

Going into September, the broad policy positions can be summarized as follows:

A potential Waller dissent would be significant because it would show that the Committee remains divided even if the majority votes to raise rates.

Growth and Labor Market Remain Resilient

The economy has not weakened enough to force the Fed toward easier policy.

Growth remains positive, consumer spending is relatively resilient and business investment, particularly in technology and AI-related areas, continues to support activity.

The labor market has cooled from earlier extremes but has not shown signs of a sharp deterioration.

This gives the Fed room to keep policy restrictive while waiting for clearer evidence on inflation.

What the New Fed Projections Could Show

The September meeting will also bring an updated Summary of Economic Projections. The key question is whether policymakers raise their expected policy path relative to the previous projections.

The direction of the dots will matter more than the precise figures.

A higher 2026 median would indicate less room for rate cuts this year. A higher 2027 projection would suggest that restrictive policy could remain in place for longer.

Oil Adds Another Inflation Risk

Oil prices above $100 a barrel introduce an additional complication for the inflation outlook.

An energy shock by itself does not necessarily justify sustained tightening. The greater concern is whether higher energy costs begin feeding into transportation, goods, services and inflation expectations.

This makes the inflation outlook more uncertain and strengthens the case for the Fed to remain cautious about declaring victory over inflation.

What to Watch in the FOMC Statement

The statement may change only modestly, but three areas will be important:

• Inflation: Does the Committee acknowledge that progress toward 2% has slowed?
• Economic activity: Does it continue to describe growth as solid?
• Policy guidance: Does the language leave the door open to additional hikes?

The wording will help determine whether September is being presented as a one-time adjustment or part of a broader policy shift.

Warsh's Press Conference Could Set the Tone

If the Fed delivers the expected 25bp increase, attention will quickly shift to the future policy path.

Three questions will matter most:

Why hike now?

What has changed since July that warrants moving rates higher?

Is another hike coming?

Does Warsh describe September as an isolated recalibration or part of a broader sequence?

How is the Fed assessing inflation?

Will policymakers emphasize the recent three-month trend or the broader 12-month picture?

The answers will determine whether markets interpret the meeting as a modest policy adjustment or the beginning of a more persistent tightening bias.

Key Scenarios

Conclusion

The September FOMC meeting is ultimately about how confident the Fed is in the disinflation process.

A 25bp hike is increasingly expected, but the larger signal will come from the combination of the dot plot, dissenting votes and Warsh's guidance.

If the dots move higher and the Fed signals that inflation remains the dominant concern, markets could begin pricing a longer period of restrictive policy. If the hike is accompanied by a clear message that further increases are not automatic, September could instead prove to be a one-off recalibration.

The decision itself may be only 25bp. The policy path that follows will matter far more.