Standard Chartered Expects Fed to Defy Markets and Hold Rates

Standard Chartered analysts expect the Federal Reserve to hold interest rates steady at its upcoming meeting, a stance that runs contrary to dominant market expectations for a rate hike amid persistent inflation concerns.

Bank Urges Caution Amid Inflation Uncertainty

In a research note, the bank argued that the Federal Open Market Committee (FOMC) should keep its policy rate unchanged on September 16, calling a potential increase the "wrong choice" under current economic conditions. The analysis suggests that core inflation may be overestimated due to the upward effect of tariffs on the core Personal Consumption Expenditures (PCE) price index.

Furthermore, Standard Chartered pointed to the Commerce Department’s upcoming comprehensive GDP revisions, which it anticipates will slightly lower recent inflation estimates. The bank advised that the Fed should wait for more clarity on these fronts, warning that a premature rate hike that later needs to be reversed would risk damaging the central bank's credibility.

Market Pricing vs. Bank's Outlook

The bank's on-hold forecast is at odds with current market pricing. According to the source, Fed funds futures indicate an 88% probability of a 25 basis point hike at the September meeting. This hawkish sentiment was amplified following comments from Fed Chair Warsh at the Jackson Hole symposium, which prompted markets to price in an additional 35 basis points of hikes.

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Looking further ahead, traders have priced in a total of 74 basis points of increases by March and more than three 25 basis point hikes over the next 12 months, signaling a firm belief in a continued tightening cycle.

Scenarios for the Dollar and Treasuries

Standard Chartered outlined potential market reactions depending on the Fed's decision. If the central bank holds rates as the bank expects, the surprise move could put downward pressure on the long end of the U.S. Treasury curve and the U.S. dollar. Such a decision might also renew questions about Chair Warsh’s commitment to fighting inflation.

Conversely, if the Fed proceeds with a rate hike as markets anticipate, the bank believes it would likely bolster the Fed chair's credibility. This outcome would be expected to help stabilize long-end Treasury yields and the dollar.