The Trade Is in the Dot Plot

The Setup

The CME's FedWatch puts the odds of a 25 bps rate hike to 3.75-4.00% at 90.3% for Wednesday's FOMC, up from about 69% before last Friday's CPI.^[1] When the event is so clearly telegraphed, the market mover lies in the press conference and post-meeting statement with Fed Chair Kevin Warsh. Warsh abolished forward guidance when he took over as Fed Chair, and that absence opens the market up to unpredictability this week.^[2]

Target rate probabilities for September 16th FOMC.^[3]

The Data

August CPI rose 0.4% MoM and held at 3.4% YoY, both in line with estimates.^[4] Core CPI, however, rose 0.3% against a 0.2% consensus estimate, while Core CPI YoY eased to 2.4%, the lowest reading since March 2021. Gasoline, rising 3.9% MoM and 27.9% YoY, drove more than a third of the monthly gain, and shelter disinflation continued at 3.0% YoY, down from 3.2%. The hotter monthly numbers highlight the unpredictability of inflationary shocks, even as the yearly figures point to a more dovish broader trend.

The inflationary shock is nowhere clearer than in the PPI release.^[5] Headline final demand rose 0.4% MoM and 5.4% YoY, above consensus and up sharply from 4.7% in July. The pipeline is where the pressure sits: processed goods for intermediate demand up 11.5% YoY, with diesel up 24.1% in a single month. The sharp jump implies a massive cost shock within the supply chain.

Historically, supply shocks have largely been overlooked by central banks due to their transitory nature. But Warsh's Jackson Hole framing suggests he will not, explaining that the inflation situation had not "meaningfully improved" and holding strong on the 2% target for long-term inflation.^[6] Add a strong labour market, and the case for a rate hike only grows stronger.^[7]

What complicates the situation is that the committee is not unified. Of the 12-member committee, three members dissented in favour of a hike in July, and four dissented in April — the most divided the FOMC has been since 1992.^[8][9][10]

Bessent's Clash

Behind the scenes of Warsh's battle against inflation is another policy authority pulling in the other direction. On August 19, U.S. Treasury Secretary Bessent announced plans to double the buybacks of long-end bonds, later tripling the value to $6 billion, in a bid to lower the rising borrowing costs.^[11][12] The first buyback last Thursday bought $5.19 billion, targeting 10- to 20-year bonds.^[13] The buyback had little impact as 10-year yields finished the week at 4.96%, the highest since 2023. The 30-year yields paint a similar picture at 5.33%, its highest levels since 2007.^[14][15]

U.S. 10 Year Treasury Yields.^[16]

Fund manager Stanley Druckenmiller's recent op-ed in the Wall Street Journal also criticised the Treasury's bond buybacks.^[17] He pointed out that the bond market was not actually crashing, arguing that the move was to artificially lower borrowing costs for the government instead of dealing with the bigger problem of American debt.

Markets have so far made their stance clear, siding with Druckenmiller over his protégé, Bessent. That matters on Wednesday, because it establishes what the long end is actually pricing: fiscal supply, term premium, and diminished foreign sponsorship. The policy rate barely enters into it.

Potential Scenarios

25 bps hike, terminal tone: Warsh delivers a 25 bps hike, with the dot plot or the post-meeting statement signalling that this is the only hike in the near future. This would send a good risk-on signal for the market, pushing most risk assets into a relief rally after the past week of pricing in the rate hike. The dollar weakens as well, benefitting gold.

25 bps hike with further hikes: A 25 bps hike but with more hikes to come would be closest to Powell's Jackson Hole speech in August 2022, which sent the S&P 500 crashing 3.4% on the day.^[18] This scenario is bearish for risk assets, while long-term bonds could find a bottom or even rally, since the move builds credibility in the Fed's focus on fighting inflation.

Hold, rates steady: The reflexive read is dovish and generally bullish on risk assets. In the context of the upcoming midterm elections, the move would represent a Fed caving in to political pressure, which would quickly retrace the initial move up. A soft dollar is to be expected here, as capital flees into gold and possibly Bitcoin. However, if the dot plot shows a lower probability of hikes in the upcoming months, expect a strong risk-on move here, with high-growth tech and crypto likely to outperform.

50 bps surprise hike: This would be a genuine outlier, and would likely lead to a sell-off across all risk assets. Short-term bonds likely get crushed, while long-term bonds could see a relief rally here.

Where We Lean

A hike looks close to certain. Warsh likely plays it close to the vest, leaning on deliberate ambiguity and declining to commit to anything, consistent with his stated preference for a quieter Fed and for markets that trade the data rather than the Fed. Regardless of the decision and the dot plot, the uncertainty looming over the markets will be temporarily lifted following Wednesday's FOMC.

Trade safe.

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References

1. CME Group FedWatch
2. Federal Reserve shifts away from forward guidance under new chief Kevin Warsh
3. CME Group FedWatch
4. Consumer Price Index – August 2026
5. Producer Price Indexes – August 2026
6. Warsh says inflation isn't slowing, vows to hit Fed's 2% target
7. The Employment Situation – August 2026
8. Federal Reserve Press Release – July 2026
9. Federal Reserve Press Release – April 2026
10. Dissent shows most disunited Fed since 1992
11. Treasury Secretary Bessent doubles US long-bond buybacks in the face of surging yields
12. Treasury poised to buy up to $6B in bonds as Bessent looks to rein in debt costs
13. US Treasury yields surge as oil spike, buyback results fuel sell-off
14. U.S. 10 Year Treasury
15. U.S. 30 Year Treasury
16. U.S. 10 Year Treasury
17. Let the Bond Market Speak
18. Today's Stock Market News — Friday, Aug. 26, 2022: Stocks Suffer a Washout After Powell's Speech at Jackson Hole