DWS Chief US Economist Christian Scherrmann indicates that the probability of a rate hike at the Federal Reserve's September meeting is quite high. Labor market data shows employment is at full capacity, with hiring rebounding and no upward wage pressure, essentially eliminating downside risks. With inflation running slightly above acceptable levels, the case for a hike is sufficiently strong from a hawkish perspective. Market expectations currently price in 3.5 rate increases over the next 12 months. August core CPI rose 2.4% year-over-year, but increased 0.3% month-over-month, exceeding the ideal 0.2% pace.

A decisive hike could enhance the Fed's credibility, Scherrmann notes. However, without forward guidance, markets might misinterpret the move as signaling greater concern among officials, leading to expectations of a longer tightening cycle. Conversely, holding rates steady could be read as ignoring inflation risks, potentially pushing yields higher. He says a rate hike would not be surprising, while also keeping a steady policy as a possible scenario. Yet, he believes the bar for holding rates unchanged is extremely high, as inflation would need to show consistent monthly declines. Furthermore, if rates remain unchanged, it is bound to trigger more dissent than seen after the July meeting, which could be interpreted as the Fed overlooking inflation risks.

On the medium-term outlook, Scherrmann argues that most inflation stems from external shocks, making a rate-hike cycle aimed primarily at domestic economic activity difficult to convincingly justify.