Rate-Hike Expectations Surge
Wall Street is shifting toward expectations that the Federal Reserve could raise interest rates at its September meeting, even as the White House continues to push for lower borrowing costs.
According to CME’s FedWatch Tool, nearly 60% of investors are betting on a 25-basis-point rate hike, which would take the federal funds target range to 3.75%–4%. The remaining market participants are largely expecting the Fed to leave rates unchanged.
The shift follows stronger-than-expected labor-market data. The Bureau of Labor Statistics reported that the U.S. economy added 162,000 jobs in August, while the unemployment rate remained at 4.1%.
Inflation Keeps the Fed Under Pressure
The labor market is only one side of the Federal Reserve’s dual mandate. Inflation remains well above the central bank’s 2% target.
The latest Consumer Price Index data showed the all-items index up 3.4% over the previous 12 months, according to the figures cited in the report.
The next CPI report is due Friday, with analysts watching closely for signs that tariffs and supply-side pressures linked to geopolitical tensions could keep inflation elevated.
Macquarie economist David Doyle said the firm had moved its baseline forecast for the first 25-basis-point hike to September from December, while continuing to expect another increase in the first quarter of 2027.
Bank of America and UBS Expect Higher Rates
Bank of America also expects the Fed to raise rates at its September meeting.
The bank’s U.S. macro team said a sufficiently strong August core PCE reading could push the probability of a September hike above 50%. It warned that failing to raise rates in such circumstances could raise questions about the Fed’s credibility and potentially push longer-term Treasury yields higher.
UBS expects two rate increases this year, in September and December.
However, UBS Chief Investment Officer Mark Haefele said investors should pay attention not only to the rate decision but also to the economic backdrop behind it.
A rate hike driven by strong economic growth would have very different implications from one triggered by persistent inflation, he argued.
Higher Yields Could Complicate Treasury Strategy
Rising Treasury yields could also complicate the efforts of Treasury Secretary Scott Bessent, who has been using bond buybacks as part of the government’s strategy to manage the Treasury market.
Long-term yields moved higher following the Fed’s previous meeting in July. Another significant rise could potentially undermine some of the recent progress from Treasury buybacks.
That leaves policymakers facing a difficult combination of elevated inflation, strong employment and growing pressure in the bond market.
White House Steps Up Pressure on the Fed
While Wall Street increasingly anticipates higher rates, President Donald Trump continues to call for lower borrowing costs.
Trump has repeatedly pressured the Federal Reserve to reduce rates, arguing that lower interest costs would benefit the U.S. economy and American households.
In a recent post on Truth Social, Trump urged the Fed to lower rates, arguing that the United States is a stronger credit than it was previously.
He also threatened to restrict U.S. trade with countries running trade surpluses with America if interest rates do not come down.
Trump urged the Federal Reserve to act in what he described as the country’s interest, while criticizing high rates as putting the U.S. at a disadvantage.
JD Vance Echoes Trump’s Call
Vice President JD Vance has also backed the administration’s push for lower rates.
Vance said lower borrowing costs could make it easier for Americans to afford homes and argued that the Federal Reserve could provide additional help by lowering interest rates.
The conflicting forces leave Fed Chair Kevin Warsh facing a delicate policy decision: stronger employment supports a tighter policy stance, while persistent inflation adds another reason for caution.
With markets now assigning increasing odds to a September hike, the Fed’s next decision could become one of the most closely watched policy moves of the year.
