The Tension in One Sentence

The Federal Reserve is almost certainly hiking rates next week — but whether it hikes again in December is a question that has Wall Street genuinely split.

September Is a Done Deal

Let’s start with what we know. When the FOMC meets on September 15-16, the Fed is expected to raise its benchmark rate by 25 basis points, lifting the target range from the current 4.00%-4.25% level. According to CME FedWatch data, traders are pricing in roughly an 85% probability of a hike following Friday’s hotter-than-expected inflation report.

This would be the Fed’s first rate hike in three years, a dramatic reversal from the easing cycle that began in September 2024.

But here’s the thing: the September decision isn’t where the uncertainty lies. The real question is what happens after.

The Data That Forced the Fed’s Hand

Friday’s CPI report was the final major piece of inflation data before the Fed’s meeting, and it came in hotter than expected.

Core CPI — which excludes volatile food and energy prices — rose 0.3% month-over-month in August, above the 0.2% consensus estimate. The annual rate ticked down slightly to 2.4%, but the monthly acceleration was enough to spook markets.

The culprit? An unlikely one: a record 5.9% surge in wireless telephone service prices. This single category added approximately 0.1 percentage points to the core reading. Economists at Bank of America, Barclays, and Pantheon Macroeconomics pointed to recent plan changes by major carriers like AT&T and T-Mobile as the primary driver.

As Omair Sharif of Inflation Insights put it: “While it is true that the wireless index added 10bps to the core CPI today, and that the core ex-wireless would have been 0.20%, I don’t think the Fed will have the luxury of slicing and dicing the data at the meeting next week”.

Why December Is the Real Question

If September is a lock, why is December so uncertain?

The historical precedent is ugly. When the Fed held rates steady in September 2024 while revising its projections higher, the two-year Treasury yield rose 11 basis points over the following week, the dollar index gained 1.4%, and the Russell 2000 fell 2.1%. Rate-sensitive sectors got hammered.

The dots tell a hawkish story. At the June FOMC meeting, the median projection for the end-of-2026 fed funds rate was revised up to 3.8% from 3.4% in March. That implies one cut at most — and with inflation running persistently above target, even that may be off the table.

The new Fed chair is a wildcard. Kevin Warsh, who took over as Fed Chair in May, has scrapped forward guidance entirely — a deliberate break from the transparency-first approach of his predecessors. At Jackson Hole in August, Warsh made his position clear: “We have work to do”.

This creates a feedback loop of uncertainty. As Morgan Stanley’s Ellen Zentner noted: “The bar for a surprise on the funds rate itself is very high, which means the entire reaction function is now in the dot plot and the press conference. Markets are not trading the decision. They are trading the guidance”.

The data is genuinely mixed. While inflation remains sticky, the Fed’s other mandate — maximum employment — is sending conflicting signals. The August jobs report was stronger than expected, but broader trends in job creation have been softening. Weak wage growth and a stagnant housing market could help bring shelter inflation down next year, but energy prices above $100 per barrel are creating fresh upward pressure.

What the Analysts Are Saying

UBS has raised its forecast from one hike to two, expecting moves in both September and December. The CME FedWatch Tool now implies an 86% likelihood of a December hike.

BofA Global Research forecasts even more aggressive action — 75 basis points of hikes across September, October, and December, taking the fed funds rate to 4.25-4.50%.

But not everyone agrees. A Reuters poll of 93 economists found that 70% expected the Fed to hold steady in September — a figure that has since been overtaken by events, but which reflects the genuine divide in expert opinion. When asked about the full year, only 56% expected rates to remain frozen through December, down sharply from 80% a month earlier.

Among primary dealers, the split is even starker: 11 expect a hold through year-end, 10 expect at least one hike.

The Market’s Reaction (So Far)

Here’s where it gets interesting. Despite the hot CPI print and surging rate-hike expectations, stocks rallied on Friday. The S&P 500 snapped a four-day losing streak, with all three major indices up over 1%.

The reason? A sharp drop in oil prices tempered inflation fears, and investors appeared to be pricing in a broader reassessment — one that weighs inflation, interest rates, oil, geopolitical risk, and tech earnings together rather than treating any single data point as decisive.

The bond market, however, was less sanguine. Two-year Treasury yields — the maturity most sensitive to Fed policy expectations — climbed after the CPI release, and the dollar firmed against a basket of currencies.

The Bottom Line

The Fed’s September hike is about as close to a certainty as anything gets in monetary policy. But December? That’s where the fog rolls in.

If inflation continues to run hot, a second hike becomes the base case. If energy prices stabilize and shelter costs finally begin to cool, the Fed may opt for a “one and done” approach — a single recalibration move before a long pause, similar to what Alan Greenspan’s Fed did in 1997.

What’s certain is that with Warsh at the helm and forward guidance abandoned, markets will be flying blind into every data release between now and December. For investors, that means volatility isn’t going anywhere.