Major global banks are now betting on the Fed raising interest rates
The rising inflation data in the United States has raised expectations for an interest rate hike. Several international investment banks have adjusted their judgments, and funds are re-pricing the trends of U.S. treasuries and interest rates.
The market's expectations have rapidly reversed on an unexpected inflation rebound.
The U.S. CPI and PPI data for August beat market expectations, which changed the market's perception of the Fed's stance on policy. The geopolitical tensions in the Middle East have driven up oil prices, with Brent crude oil hitting the $100 per barrel level. Now, the market is beginning to fear that inflation will not soon revert back to the 2% target. The original expectation was for the Fed to cut rates in December 2025 and keep them there for all of 2026. They were being patient.
In a short time, many institutions have changed their views. Many foreign brokers have started to change their forecast, thinking the Fed will do something to increase interest rates in the September meeting. The shift in CME data is indicative of the change in the market sentiment. The probability of this rate hike was priced in at about 70% and subsequently, it has risen to 90%. The market is also beginning to price in the possibility that the Fed might raise interest rates again in December this year.
Major international banks have changed their views, with hawkish voices increasing.
Several leading international investment banks, including Goldman Sachs, JPMorgan Chase and HSBC, have updated their assessments of the current Fed meeting. Several institutions have unanimously predicted that the Fed will raise its policy interest rate by 25 basis points at the FOMC meeting on September 15th and 16th.
The HSBC report pointed out that the progress of inflation decline was less than expected, which was the core reason for this shift in expectations and supported the judgment of this interest rate hike. JPMorgan Chase raised its estimate for the long-term policy interest rate and raised the long-term interest rate target to 3.25%. The judgment of Goldman Sachs was relatively unique. Although the bank recognized the possibility of an interest rate hike in September, it believed that this rate hike was more a result of early pricing in the trading market.
Oil prices have become a new variable for inflation.
The situation in the Middle East has once again become tense, and international crude oil prices have risen. Brent crude oil has exceeded $100 per barrel, and WTI crude oil has followed suit. The increase in energy prices will raise costs in various sectors such as transportation and chemicals. The upward trend in oil prices has a lag effect. In the short term, when oil prices surge, they will gradually be reflected in consumer prices. This is also the main reason why investment banks are concerned about the strengthening of inflation stickiness.
Once energy costs are at a high level, even if the prices of other goods remain stable, the overall inflationary downward speed will slow down. This external supply shock will increase the difficulty for the Fed's decision-making. If the monetary policy is tightened only due to the increase in energy price, it is difficult to address the supply-side problem directly. However, if oil prices continue to push up overall prices, inflation expectations may rise again.
The U.S. debt market and foreign exchange market responded in advance, with the previous period of interest rate cut cycle being suspended.
Before the Fed's meeting, the bond market had already traded in anticipation of an interest rate hike. The U.S. treasury yields rose, the attractiveness of U.S. dollar assets increased, and funds would flow back from emerging markets to the United States. At the same time, the policy decision of the Bank of Japan was also a key focus for the market. If the policy directions of the two central banks diverge, it will stir the global exchange rate market. If the Fed moves towards tightening and the Bank of Japan continues to raise interest rates, the exchange rate fluctuations of the Japanese yen and the dollar will be amplified.
In December 2025, the Fed implemented one interest rate cut, and then stopped the easing pace. The market originally assumed that the interest rate would remain static throughout 2026, waiting for inflation to fall. The market discussion following release of the August price data was no longer about cut interest rates but whether to continue raising interest rates.
There are two different scenario scenarios. In the first scenario, inflation only rebounds temporarily, and core goods and service prices will subsequently fall. After this small interest rate hike by the Fed, it will no longer continue to tighten and wait for some time to observe the data. In the second scenario, inflation remains sticky and oil prices remain high. The Fed will continue to raise interest rates in December this year, and the high interest rate will last longer.