Hello Nay Sayers, the Fed Hikes Interest Rates in 5 Days, Odds 85 Percent

A rate hike is now a done deal, as expected in this corner.

According to CME Fedwatch the betting odds are 85.4 percent that the Fed hikes rates a quarter point on September 16, up from 72.4 percent yesterday, and as low as 40 percent within the past two weeks.

My estimate for about a month was the Fed would hike unless the August jobs report was bad and the CPI report today was favorable. Neither happened.

October Rate Hike Odds

There is a 32.1 percent chance the Fed hikes rates in September and again on October 28.

That’s possible, but color me skeptical. The Fed is not going to want to hike that close to the midterm election on November 3.

Political Realities May Force the Fed to Hike in September

On August 31, 2026, ahead of the jobs report, I commented Political Realities May Force the Fed to Hike in September

It will be a stretch for the Fed to pause for many reasons, not just the CPI.

The CPI announcement on September 11 and the Jobs report on September 4 are going to determine whether or not the Fed hikes or remains on pause.

The only measure that remotely supports a pause is core CPI. But after being reliant on PCE for decades, that would be quite the switch.

There is nothing about month-over-month details that suggest the Fed should pause.

The CME Fedwatch rate hike odds are 59.7 percent. The odds jumped from under 40 percent on Fed Chair Kevin Warsh’s Jackson Hole speech on August 28.

Odd Too High or Too Low?

Because I expect the Cleveland Fed to be close on its inflation nowcast, I believe those odds favor a rate hike.

A decision to hike also depends on the jobs report on Friday September 4. If the report is OK to strong, the Fed will have more reason to hike.

But even if the report is weak, a headline CPI of 0.4 percent will be hard for the Fed to ignore.

Politics is another huge hurdle that will force a hike sooner rather that later. 

The Final Hurdle is Political

While macro indicators including credit and the strong Cleveland Fed Nowcast provide the fundamental backdrop for a rate hike, the final hurdle is purely political and institutional.

Jim Bianco’s tracking model places the FOMC in a rigid 5-5 gridlock, thrusting former Chair Jay Powell out of the background and directly into the role of the ultimate swing vote.

However, treating Powell as a true ‘unknown’ ignores deep-seated institutional inertia. Historically, Powell has fiercely defended committee cohesion and has never dissented against a sitting Chair. For the Fed to project long-term stability under newly minted Chair Warsh, a public fracture between current and former leadership is a line the committee will desperately want to avoid crossing.

But there is sill one more wrinkle to discuss, and that is the election.

The Election

Convening less than two months before the November mid-terms, the FOMC will operate under an intense political microscope.

Historically, the central bank prefers to fade into the background during election cycles to avoid accusations of interference. Dovish voters will undoubtedly attempt to weaponize any minor softness in the September 4 payrolls as an excuse to hold steady and dodge political crossfire.

Yet, under Chair Warsh’s newly minted regime, delaying a mathematically justified hike to appease politicians would represent the ultimate failure of institutional independence.

If the Cleveland Fed Nowcast proves accurate, a hot inflation print will effectively strip away the committee’s political cover. In a fractured Fed of 12 independent voters, hiding behind election-year precedent will no longer be an option.

The Extraordinary Tactical Trap for Warsh

Ignoring politics, the odds of an aggressive policy tightening would be much higher right now.

That political gravity is why we must heavily discount the odds of the Fed executing two distinct rate hikes before voters head to the polls.

This creates an extraordinary tactical trap for Warsh.

If Warsh postpones a hike in September, but the August and September PCE prints are hot, he will be forced to either hike interest rates six days before the election or freeze policy. Hiking would trigger a huge political firestorm but pausing would look entirely partisan in defense of Trump.

Moreover, there is no meeting in November. Delaying necessary policy tightening until December would allow hot inflation to fester for a full quarter, creating a reputational nightmare. In contrast, hiking would create a political nightmare.

Conclusion: The Strategic Imperative for September

The upcoming September meeting represents the Fed’s cleanest and most viable window to execute.

Unless the jobs report is miserable and the CPI is tame, look for Warsh to hike rates in September.

To avoid any look of politics or uncertainty, I think Bianco will be wrong on the number of dissents, say three or less.

Number of Dissents

I am sticking with my August 31, assessment of dissents. Expect one for certain and I expect a maximum of 2 more, possibly 3.

Call it 1-3 dissents with an outside chance of four. In order, I see it as 2-1-3-4.

I will discuss the CPI report that triggered the jump in odds shortly.