The Federal Reserve is virtually guaranteed to raise interest rates for the first time since 2023 tonight, but what truly grips market attention is what Walsh says afterward — or, more crucially, what he chooses not to say.

Currently, markets have priced in a probability exceeding 90% for a 25-basis-point rate hike this week, which would lift the target range from 3.5%-3.75% to 3.75%-4.00%. This expectation stems from a combination of three factors: Walsh's hawkish remarks at the Jackson Hole symposium, the substantially stronger-than-expected August nonfarm payrolls data, and the higher-than-anticipated month-over-month increase in August core CPI. The rate hike itself is no longer a point of debate; the real market focus lies in how many additional increases the dot plot will signal for this year, and whether Walsh can offer a clear policy path during his press conference.

Citigroup and Goldman Sachs largely converge in their core assessment: this will be a "dovish hike," with the Fed unlikely to proactively signal sustained tightening, and the median dot plot expected to show just one more increase this year. However, Standard Chartered Bank holds a diametrically opposed view — the bank argues that a September hike itself would be a policy mistake, and the correct choice would be to wait until the impact of tariff shocks subsides before making any judgment.

Meanwhile, according to strategy analysis from JPMorgan and Goldman Sachs, if the Fed proceeds with the hike but declines to provide clear forward guidance, the yield curve may steepen and offer modest support to equities. Should Walsh unexpectedly deliver a strongly hawkish signal pointing to consecutive hikes, a broad surge in interest rate volatility would follow. Conversely, a surprise decision to hold rates steady would not only severely damage the Fed's policy credibility, but could also trigger a stock market selloff and drive long-end Treasury yields sharply higher on inflation concerns.

Notably, this Fed rate increase could also spark political friction. Trump has recently reiterated that the U.S. should have the lowest borrowing costs globally, and a hike may subject Walsh to fresh criticism from the White House.

The Logic Behind the Hike: Walsh Backed Into a Corner

Walsh's speech at the Jackson Hole symposium in late August effectively painted himself into a corner. He explicitly noted that 12-month PCE inflation stood at 3.7%, with the six-month annualized rate running as high as 4.1% — both well above target — and warned that more than half of PCE components continue to rise at a pace exceeding 3%. He cautioned that unless inflation shows clear progress toward the 2% goal, the Fed has "more work to do."

Two weeks later, August core CPI rose 0.3% month-over-month, beating the 0.2% expectation and further cementing rate hike expectations. According to the latest survey from Reuters, 85% of 101 economists expect the Fed to raise rates, with money markets pricing in close to 90% odds of a hike.

Despite this, a rate increase is not a foregone conclusion. Fed Governor Waller, in remarks delivered before the blackout period ahead of the September FOMC meeting, struck a notably dovish tone, indicating he would prefer to hold rates steady if August inflation data shows continued progress, while adding he would consider a hike if inflation runs hot. Additionally, Oxford Economics believes that three consecutive sets of moderate inflation data provide grounds for holding steady, and argues the dovish case should not be easily dismissed.

Citigroup and Goldman Sachs: A Reluctant Hike Framed as a "Calibration"

According to analysis from Wall Street Insights, Goldman Sachs anticipates that a 25-basis-point hike at the September FOMC meeting stems not from solid economic logic but rather from being effectively "coerced" by market pricing. The Fed is expected to make only the minimal necessary changes to its statement, avoiding any forward guidance on the future path — essentially delivering a "signal-free hike."

Goldman Sachs explicitly states that it does not believe there is sufficient economic basis for raising the federal funds rate at this time. The bank's core argument: the entire overshoot of inflation beyond the 2% target can be attributed to one-off factors whose effects will fade, including tariff impacts, energy and Iran conflict effects, and software and accessory price pressures. Goldman Sachs contends that core PCE inflation improving to an annualized rate of approximately 2.5% between June and August (including expected methodological revisions) is early evidence of these transitory shocks dissipating.

On the question of inflation breadth, Goldman Sachs also dissents. While more categories have recently seen prices rising at annualized rates above 3%, the bank notes that once tariff effects are excluded, inflation breadth is roughly comparable to levels seen during historical periods of 2% inflation. Furthermore, the bank's "bottleneck tracking indicator" shows that sector-level capacity constraints are now even slightly less severe than before the pandemic — the economy is not overheating, which is typically the core justification for rate hikes.

Goldman Sachs believes that after the August CPI release, market pricing for a hike approached 90%, and the Fed will be compelled to raise rates to avoid a violent market reaction from standing pat — this is a hike "forced out" by market pricing, not proactive tightening driven by fundamentals.

Citigroup's base case projects the Fed will define this hike as a "calibration" and signal there is no imperative for further increases. The accompanying forward guidance will no longer point to additional policy rate rises. Walsh will likely downplay the move as a "modest adjustment" or "fine-tuning," suggesting to markets that if inflation shows signs of returning to target, further hikes may not be necessary.

The Dot Plot: One Hike or Two — The Lingering Question

In the absence of clear statement guidance, the dot plot and Walsh's press conference become the market's biggest unknowns.

Timiraos, the new "Fed whisperer" at the Wall Street Journal, points out that the Fed has completed a "hike-and-stop" maneuver only once in its history, back in 1997, and historical patterns suggest rate increases tend to come in sequences. Former Fed Vice Chair Richard Clarida has also stated: "If they hike next week, there will certainly be more to come." Currently, CME FedWatch data shows markets have priced in nearly four cumulative hikes by October 2027.

Goldman Sachs expects the dot plot to show a narrow 10-to-8 majority favoring just one hike in 2026 (with Waller and possibly other members showing zero). The bank's rationale: some members harbor ambivalence about the hike itself, while others do not wish to further elevate market expectations for additional tightening.

However, Goldman Sachs also identifies a clear tail risk: if more members view this week's hike as a normal response to rising oil prices and AI demand, and treat it as the beginning of a consecutive hiking cycle, the risk of a majority favoring two hikes cannot be dismissed.

On dissents, Goldman Sachs expects Waller to cast an opposing vote, given that the three-month annualized rate of core PCE inflation (including expected methodology revisions) has fallen to approximately 2.5%, below his previously stated 2.8% threshold for maintaining rates.

The Summary of Economic Projections (SEP), released alongside the rate decision, will be another market focal point. On inflation forecasts, both Citigroup and Goldman Sachs expect core PCE projections to be revised downward due to methodological changes. Goldman Sachs forecasts the 2026 median core PCE projection will be trimmed slightly from 3.3% in June to 3.2%, providing data support for pausing hikes. Median dots for 2027 and 2028 are each expected to show one rate cut, holding at 3.625% and 3.375% respectively.

Goldman Sachs also notes that the neutral rate estimate may shift slightly higher at this meeting and gradually rise to roughly 3.25%-3.5% over the coming year — partly because the economy continues to perform well under higher rates, leading some members to believe current rates are near neutral, while AI investment demand could also push the equilibrium rate upward.

Walsh's Press Conference: The Market's Biggest Wildcard

Beyond the dot plot, Walsh's press conference represents the greatest source of uncertainty tonight. Notably, Walsh is expected to once again decline to submit his own individual projections, continuing his longstanding aversion to forward guidance.

Regarding the press conference, Citigroup warns that if Walsh merely emphasizes "more work to do" without offering near-term rate guidance, markets could interpret this as a danger signal. In this hawkish risk scenario, markets might price in hikes at both the October and December FOMC meetings, potentially extending further-hike risk pricing into 2027.

Goldman Sachs offers a more specific take on this scenario: the FOMC may want to guide markets toward reducing confidence in an October hike (currently near 50%), but will not say so explicitly in the statement. Instead, Walsh might state during the press conference that the FOMC will "carefully assess" incoming data before deciding on further action, or that it wants to see multiple forthcoming inflation reports, or that it will observe how underlying inflation trends evolve — any of these formulations would signal the committee wishes to gather more data over an extended period before acting.

Goldman Sachs adds that since many investors already view the early November midterm elections as a political obstacle to an October hike, preventing markets from making October a "default baseline" should not be difficult.

Walsh faced market criticism after the July meeting press conference for failing to clearly explain the decision to hold rates steady, which triggered a jump in long-end Treasury yields. Should he remain equivocal again, the market reaction could be even more pronounced.

Standard Chartered: The Hike Itself Is a Policy Mistake

Standard Chartered Bank's September 14 report takes a starkly opposite stance, concluding that the Fed should hold rates unchanged at this meeting and arguing that raising rates remains "the wrong policy choice."

The bank's core argument: current core inflation may be overstated. Its tracked supercore CPI has recently declined noticeably, returning to the normal range of the 2010s. Chain-weighted core CPI and core PCE have shown a notable divergence recently, with chain CPI better reflecting actual consumer spending patterns, and its recent trajectory merits policymakers' attention. Additionally, multiple internal Fed analyses suggest tariffs may contribute approximately 0.7 percentage points to PCE inflation; with tariff revenues peaking in Q4 2025, their inflationary impact may gradually diminish over the following months.

Standard Chartered also points out that market pricing forms a reverse constraint on policy, creating a feedback loop risk where "market expectations drive policy, and policy reinforces market expectations." Walsh himself warned in his Jackson Hole speech that if markets rely on Fed guidance while the Fed relies on market prices, policymakers risk overlooking new economic developments and increasing the likelihood of policy errors.

On the vote math, Standard Chartered notes that three members supported a hike at the July FOMC meeting; to achieve a hike in September, at least four additional members who previously favored holding steady would need to flip to reach the seven-vote threshold. The bank believes current data is insufficient to meet this condition.

Asset Pricing and Volatility Dynamics: How Markets May Respond

The Goldman Sachs interest rate volatility research team noted in a September 15 report that U.S. rate implied volatility remained generally subdued during the sustained yield uptrend, but last week's selloff was accompanied by a marked increase in volatility. After controlling for broader macroeconomic fundamentals, current U.S. rate implied volatility has moved from the lower end of fair value toward the midpoint, indicating market vulnerability to scenarios where the policy path distribution widens further.

Goldman Sachs believes that assuming the Fed hikes 25 basis points as expected, the subsequent trajectory of volatility will depend primarily on forward signals from the SEP and press conference. If the dot plot shows one to two hikes accompanied by data-dependent language, though it cannot fully eliminate forward uncertainty, it should allow volatility to recede somewhat and flatten the tail of the curve.

Goldman Sachs's historical research shows that when markets have already priced in a 75%-90% probability of a hike, mildly hawkish surprises (i.e., the expected hike materializing) tend to generate favorable volatility-selling returns. This supports the view that volatility will partially retreat under the "expected hike plus moderate signals" scenario.

Conversely, if the Fed unexpectedly holds rates steady, Goldman Sachs believes this would trigger a larger shock across the entire volatility surface — not only failing to immediately lower future hike expectations, but also exacerbating front-end uncertainty while maintaining inflation concerns and term premia. Last week's European Central Bank meeting provides a reference point: strong hawkish signals accompanying a hike caused short-end volatility to spike sharply and spread across the entire curve.

Under its base scenario, Goldman Sachs expects that if subsequent inflation data is sufficiently benign, the Fed will pause after this week's meeting, with volatility gradually easing as rate hike risks dissipate.

According to JPMorgan's strategy team scenario analysis, if the Fed hikes without forward guidance (the base case), the S&P 500 could rise 25 to 75 basis points. Should Walsh unexpectedly deliver a "crush inflation" hawkish message, equities could face a 1% to 2% decline.

The most dangerous tail risk lies in an "unexpected no-hike" outcome, which would not only trigger dovish repricing at the front end, but also drive long-end yields sharply higher on inflation concerns and damaged credibility, causing the yield curve to steepen dramatically and prompting a stock market selloff.