Editor's note: As the Federal Reserve's policy meeting approaches, a rate hike has once again become the market's baseline expectation. U.S. August job growth came in stronger than expected, headline CPI rose to 3.4% year-on-year, and the energy price shock has added fresh uncertainty to the inflation outlook. Meanwhile, the 10-year Treasury yield is approaching 5%, and dollar credibility and Fed independence have re-entered the trading spotlight.
But what this meeting truly needs to answer may not just be "hike or not hike," but whether the Fed's policy reaction function has already shifted: in the past, the market believed the Fed would keep rates unchanged unless data forced it to tighten; now, ING believes the baseline scenario has flipped to the Fed leaning toward a hike unless data justify a pause.
ING Chief International Economist James Knightley, Head of U.S. Research Padhraic Garvey, and Global Head of Markets Chris Turner expect in their latest preview that the Fed will hike 25 basis points on September 16. But in their view, this is more likely a policy "recalibration" rather than the starting point of a new cycle of consecutive rate hikes.
The key to this judgment is that a hike must both respond to still-elevated inflation and carry the task of stabilizing inflation expectations, short-end rates, and dollar credibility; but the rise in long-term Treasury yields is also being driven by real rates, fiscal supply, and energy risks, and a single hike cannot solve that. What the market really needs to watch next is how the Fed describes its subsequent policy path.
The following is a translation of the original text:
After Federal Reserve Chair Kevin Warsh spoke at the Jackson Hole Global Central Banking Symposium, ING adjusted its September policy forecast to a 25 basis point hike. The employment and inflation data released afterward further reinforced that judgment.
However, ING does not believe the Fed is about to embark on a new round of consecutive rate hikes. More precisely, this may be a "calibration hike" aimed at inflation, financial conditions, and policy credibility.
The policy reaction function has already flipped
After signaling hawkishness in June and then slightly pulling back at the July press conference, Warsh needed to further explain at Jackson Hole how the Fed under his leadership will formulate policy.
In his speech, he emphasized that U.S. inflation has been above target for five and a half consecutive years; with the economy near full employment, financial conditions can hardly be described as tight. This prompted ING to change its framework for judging the September meeting.
The previous baseline scenario was that the Fed would keep rates unchanged unless economic data provided sufficient justification for a hike. Now, ING believes this logic has reversed: the Fed is more likely to hike unless data proves sufficient to justify a pause.
The reaction function referred to here is not a publicly disclosed formula, but rather how the market judges what policy will be adopted under what economic conditions based on the central bank's past statements and actions. A change in it means that even if the same set of data has not deteriorated significantly, the market's understanding of the policy outcome may differ.
Recent data has not provided the Fed with sufficient justification for a pause. U.S. August nonfarm payrolls increased by 162,000, with the unemployment rate holding at 4.1%; headline CPI rose 0.4% month-over-month and 3.4% year-over-year, while core CPI rose 0.3% month-over-month and 2.4% year-over-year. The data released by the U.S. Bureau of Labor Statistics is broadly consistent with the figures cited by ING, except that ING described the unrounded month-over-month core CPI increase as 0.29%.
ING pointed out that the 0.29% monthly core inflation rate is nearly double the roughly 0.17% monthly trend needed to achieve the 2% annual inflation target. At the same time, some business surveys show that U.S. economic activity may have reaccelerated in the summer, while disruptions to Middle East shipping have pushed oil prices above $100 per barrel.
Against this backdrop, ING judges that Warsh's emphasis on medium-term trends rather than single-month data suggests he may already be leaning toward proposing a rate hike. The report also speculates that Treasury Secretary Scott Bessent may support this choice as well, given the continued rise in long-term U.S. Treasury yields. However, this is ING's assessment of the policy stance, not an opinion that the officials concerned have publicly confirmed.
A 25 basis point hike, but it could be a 'one-and-done' hike
Normally, once a central bank restarts rate hikes, the market will naturally infer that more moves will follow. According to the market pricing cited by ING at the time the report was published, investors not only expected the Fed to hike on September 16, but also priced in about two and a half additional hikes thereafter.
ING takes a different view. Its baseline judgment is that September may see a 'one and done,' meaning one hike followed by a return to a wait-and-see period.
The report draws a parallel between the current environment and the mid-1990s: after cutting rates in early 1996, the Fed paused, then implemented a "risk-management hike" in March 1997, after which it stayed on hold for an extended period. The purpose of such a hike was not to actively suppress aggregate demand, but to preemptively contain the risk of inflation and financial conditions spiraling out of control.
ING believes the case for a "one-and-done hike" rests primarily on three factors.
First, although inflation remains above target, medium- and long-term inflation expectations among markets and consumers have not yet become significantly unanchored. Second, consumer confidence is already at very depressed levels, and consecutive tightening could further weigh on demand. Finally, aside from the unexpectedly strong August employment data, the overall trend in U.S. job creation has already slowed somewhat, and second-quarter GDP performance was also weaker than expected.
On the inflation outlook, ING expects that slowing wage growth, tariff refunds, and a stalled housing market could together help cool housing inflation, bringing overall inflation back toward 2% by 2027. The main risk to this forecast is energy prices: if oil prices remain elevated, the disinflation process could be delayed.
Based on this assessment, ING expects the Fed's latest economic projections may modestly lower inflation forecasts, while GDP and labor market projections see limited changes. The report expects the dot plot may show the federal funds rate at 4% for both end-2026 and end-2027, before gradually returning to the previously projected longer-run rate of 3.1%.
These are all ING forecasts, not a policy path already announced by the Federal Reserve.
10-year Treasury yield approaches 5%, a single hike can only stabilize expectations
The long-term Treasury market is another key variable for this meeting. At the time the report was published, the 10-year Treasury yield had risen to around 4.9%, just a step away from the 5% threshold.
ING believes the recent rise in yields stems partly from elevated inflation data and partly from gradually rising inflation expectations. Although this shift has not yet reached an uncontrolled level, a 25-basis-point hike could help signal that the Fed still prioritizes price stability, thereby limiting further upside in inflation expectations.
However, the report does not believe a hike would be sufficient to prevent the 10-year Treasury yield from testing 5%. The reason is that the rise in long-term yields is primarily driven by real rates, which reflect multiple factors the Fed cannot directly control: productivity growth expectations may raise the economy's neutral rate; expanded U.S. Treasury issuance brings supply pressure; and the Iran war and its impact on oil prices add inflation and term premium risks.
In other words, if the rise in yields comes mainly from fiscal supply and real interest rates rather than expectations for the short-term policy rate, then even if the Fed hikes, it can only influence part of it.
The short end of the market is also sending a hawkish signal. ING noted that the spread between the two-year U.S. Treasury yield and the federal funds rate has widened to about 90 basis points. Based on the institution's experience, when this spread exceeds 75 basis points, it means the bond market is already prepared for a rate hike.
This does not accurately predict when the Fed will act, but it indicates that a rate hike is unlikely to cause an unexpected shock to the short end of the market. ING therefore believes that the recent flattening of the yield curve may have gone too far: the short end has priced in too many rate hike expectations, while the long end may still be driven higher by real interest rates and Treasury supply.
The dollar may receive short-term support, but the long-term direction may not necessarily change
At the time the report was published, the dollar index was in the middle of its 96 to 102 range for the year. On the surface, overall dollar volatility was limited, but during this period it was successively affected by U.S. foreign policy, Warsh's appointment as Fed Chair, and the U.S. Treasury's intervention in the foreign exchange and bond markets.
ING believes that a rate hike could provide short-term support for the dollar through two channels.
On the one hand, a rate hike helps preserve the Fed's credibility in controlling inflation and alleviates the so-called "debasement trade." This trade is built on investors' concerns about Fed independence, fiscal expansion, and the purchasing power of the dollar. On the other hand, higher short-term dollar interest rates typically increase the yield advantage of dollar assets relative to assets denominated in other currencies.
Rising energy prices may also reinforce the dollar's relative performance. Europe and Asia generally rely on energy imports, and higher oil prices worsen their terms of trade. ING therefore expects that in the coming weeks, EUR/USD may fall back to around 1.15; if the Bank of Japan fails to meet the market's hawkish expectations, USD/JPY could rise back into the 157 to 158 range.
But ING does not believe the dollar will thereby enter a sustained appreciation cycle. The institution still interprets this rate hike as a policy recalibration rather than the beginning of a new tightening cycle.
Its baseline forecast is that if U.S. inflation returns to target around the second quarter of 2027, the focus of money market trading may shift again from rate hikes to rate cuts. Under this logic, the dollar index's 101.80 touched in June may remain the cyclical high for 2026.
Therefore, the most important message from the September meeting is not just the 25-basis-point rate adjustment, but how the Fed defines this action. If the statement, dot plot, and Warsh's press conference emphasize one-off risk management, the support for the dollar and short-term yields from the rate hike may be relatively limited; only if the Fed clearly raises its future rate path will the market need to reassess the possibility of consecutive rate hikes.
The variables to watch next include energy prices, the monthly trend in core inflation, long-term inflation expectations, and the real yield on 10-year U.S. Treasuries. If inflation and inflation expectations continue to rise, ING's "one-and-done" call will face challenges; if wage and housing inflation continue to cool, while long-term yields are driven mainly by fiscal supply, then a September hike is more likely just a recalibration rather than the restart of a tightening cycle.
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