The countdown to the Federal Reserve's September meeting is underway, with markets holding their breath for a shift in policy direction.

A report released by StanChart on September 14 makes a clear call: the Fed will hold rates steady at the September 15-16 FOMC meeting, with the decision due out early Thursday Beijing time. In the bank's view, raising rates now would still be a policy misstep, and a more prudent approach would be to wait for the tariff shock and recent data revisions to settle before judging whether inflation is forming a genuine trend.

The problem lies in how aggressively the market has positioned itself. Fed funds futures currently price in an 88% probability of a 25 basis point hike in September. If the Fed holds its ground, the rate market could face a notable repricing, and the dollar may soften briefly. Conversely, if the Fed does deliver a hike, hawkish expectations could be further amplified. StanChart believes Warsh's credibility could play a stabilizing role in that scenario, lending support to both the dollar and the long end of the Treasury curve.

As such, the trading focus for the September meeting goes beyond the rate decision itself, extending to how the Fed will communicate its forward path and, in particular, whether Warsh can re-anchor market expectations.

Inflation pressures may be overstated as the tariff impact fades

The report argues that current core inflation readings may be exaggerated. Tariffs have indeed lifted core PCE, but the magnitude and duration of that effect remain highly uncertain, and the comprehensive GDP revision could also reshape how markets gauge the trajectory of the economy and prices. Until the data stabilizes, the Fed has no urgent need to move on rates.

The bank's tracked core-services CPI has pulled back notably in recent months, returning to the normal range seen in the 2010s. The report contends that current CPI pressure is largely driven by goods prices, with tariffs as a major contributor, but that does not necessarily mean the broader economy has developed sustained inflationary momentum.

Chain-weighted core CPI and core PCE have historically moved in tandem over long stretches, yet they have recently shown a notable divergence. The report points out that chain-weighted CPI better reflects actual consumer spending patterns, and its recent direction deserves close attention from policymakers.

Additionally, several internal Fed analyses suggest tariffs may have contributed roughly 0.7 percentage points to PCE inflation. With tariff revenues expected to peak in the fourth quarter of 2025, their inflationary effect could taper off over the following months. In other words, the window in which tariff-driven inflation begins to recede may be opening now.

From a risk-management perspective, waiting for data confirmation does not close the door on hiking. If subsequent readings confirm inflation is reigniting, the Fed could still deliver a 50 basis point move in one go. Conversely, if it hikes too early and is later forced to reverse course, that could do greater damage to policy credibility.

With 88% odds priced in, Warsh faces a policy feedback risk

Even though StanChart judges that September should not bring a hike, the market has clearly pivoted hawkish. Fed funds futures now assign an 88% probability to a 25 basis point hike this month, while pricing a cumulative increase of roughly 74 basis points by March next year. Much of this shift in sentiment stems from Warsh's speech at Jackson Hole.

However, the report cautions that markets may have latched onto only the hawkish elements of Warsh's remarks. On one hand, he stressed the importance of returning inflation to target; on the other, he noted that policymakers must assess whether underlying inflation is rising, falling, or stalling, rather than making calls based on a single data point.

Warsh also warned that if markets rely on Fed guidance while the Fed in turn leans on market pricing, policymakers risk overlooking new economic developments, raising the odds of policy missteps.

In StanChart's view, that risk is being amplified. The higher the rate-hike expectations climb, the stronger the constraint market pricing exerts on policy, and the more the Fed becomes susceptible to existing expectations, forming a feedback loop where market expectations drive policy, and policy then reinforces those expectations.

Therefore, if the Fed ultimately holds in September, the key question will be how Warsh manages the elevated rate-hike expectations already in play, explaining why no move is needed now while proving that the Fed will not be led by market pricing.

The vote arithmetic does not support a September hike either

The voting structure also underpins StanChart's assessment. At the July FOMC meeting, three members already voted for a hike. To achieve a real rate increase in September, at least four members who previously favored holding would need to switch sides to reach the seven-vote threshold.

StanChart believes Warsh's most likely strategy is to avoid becoming a minority voice without actively pushing for a hike. If four more members flip, he could join the hiking camp. If only three flip, Warsh might vote for a hike to avoid a 6-6 tie. If just two flip, he still has room to hold steady.

The critical factor is whether the data since July is compelling enough to move at least three of the "hold" camp to change their stance. StanChart argues the current data has not yet met that bar.

The real test comes at Warsh's press conference

The report expects the FOMC statement to see no major overhaul. On the SEP side, the dot plot is unlikely to turn significantly hawkish, but compared to June, the scope for rate cuts may narrow further, with the median projected rate possibly edging higher.

If the Fed holds, Warsh will face a tougher test at the press conference, needing to explain why no hike is necessary now while addressing how the Fed views the high rate-hike expectations already baked into the market.

Markets are particularly likely to press on whether an October hike remains on the table. Warsh will probably emphasize a "data-dependent, meeting-by-meeting" approach, but without clearer policy triggers, lingering doubts about his stance could persist.

Ultimately, the impact of the September FOMC rests not only on the rate decision itself, but on whether Warsh can effectively steer forward expectations. For the dollar and the long end of the Treasury market, the key variable after the meeting will be how markets reassess the future rate path.