Fed Outlook: Hike Likely, Timing Still in Flux

The latest labor market data has nudged expectations for a rate increase at the Federal Open Market Committee’s (FOMC) September meeting. According to CME’s FedWatch, 58.4% of traders now see a 25‑basis‑point hike that would lift the federal funds target range to 3.75%‑4.00%. The remaining 41.6% believe the Fed will keep rates unchanged.

The shift stems from a Bureau of Labor Statistics release that showed U.S. employment grew by 162,000 jobs in August while the unemployment rate held steady at 4.1%. At the same time, inflation remains stubborn. The 12‑month consumer price index, released in mid‑August, stood at 3.4%—well above the Fed’s 2% goal. The next CPI report is due Friday, and analysts expect it to reinforce the case for a hike, especially as supply‑chain disruptions from geopolitical tensions and tariff pressures persist.

Macquarie’s David Doyle updated his outlook in a Friday note, moving the baseline case for a 25‑basis‑point increase to September (previously December) and still forecasting a second 25‑basis‑point rise in the first quarter of 2027.

Bank of America’s macro team added that a hike next week is likely if August core Personal Consumption Expenditures (PCE) data shows a month‑over‑month rise of 0.24% or higher. They warned that a decision to hold could damage the Fed’s credibility and push long‑term yields higher, potentially offsetting Treasury buyback efforts led by Treasury Secretary Scott Bessent.

UBS projects two rate increases this year—one in September and another in December. Chief investment officer Mark Haefele emphasized that the context of the hike matters more than the hike itself, noting that a Fed response to robust economic growth differs from a response to inflationary pressures.

In political circles, President Donald Trump has continued to push for lower rates, arguing that the U.S. credit profile has improved. He also threatened to halt trade with countries that run a U.S. deficit if rates do not fall.

With the September meeting approaching, market participants remain focused on the interplay between employment strength, inflation dynamics, and the Fed’s policy stance, all of which will shape the trajectory of U.S. rates in the coming months.