SWS: A September Rate Hike May Be the Fed's Least Bad Option
nashnova research
August nonfarm payrolls hit 162,000 — nearly triple the 55,000 forecast — pushing the odds of a September Fed hike to roughly 60%. SWS Research argues that *not* hiking could hurt more: whenever pre-meeting expectations topped 40%, the Fed has hiked every single time.
Why did one jobs report change everything?
August payrolls came in at 162,000, almost three times the 55,000 consensus. The gap was large enough to reset the debate.
Before the release, Fed Governor Waller's dovish remarks had dragged hike odds down to 50%. After the print, odds snapped back to roughly 60%.
This means → a single employment report tilted the scales decisively toward a hike.
What does a 60% probability actually tell us?
SWS reviewed all 92 FOMC meetings since 2015. Whenever market-implied hike odds exceeded 40% within 10 trading days of a meeting, the Fed hiked — all 20 times, without exception.
Only 5 times did odds sit between 30%–40% and the hike still fail to materialize — May 2018, September 2015, September 2016, November 2018, and July 2026.
This means → two of those misses — May 2018 and July 2026 — triggered a "blowback" effect: the 10-year term premium — the extra yield investors demand for holding long-dated bonds — rose 5.0 and 6.2 basis points respectively within 10 trading days.
In plain terms = at 60%, skipping a hike risks punishing the market more than delivering one.
Can CPI come to the rescue?
The last key data point before the September meeting is August CPI. SWS ran 10,000 Monte Carlo simulations — a statistical method that uses repeated random sampling to estimate probabilities — and found only a 10.6% chance that CPI comes in meaningfully below expectations.
Inflation faces twin pressures: the U.S.–Iran conflict has disrupted Strait of Hormuz shipping, pushing oil prices higher and the Gulf Coast crack spread to $67.9/barrel; AI-related services are also showing structural price increases.
Historical data shows that even when CPI undershoots, same-day hike expectations drop by an average of just 6 percentage points — far too little to pull 60% into the safe zone.
This means → betting on a single CPI print to derail the hike is a low-probability wager.
Where does the Fed itself stand — hawks vs. doves?
The July meeting ended with a 9-to-3 vote, exposing deep internal division. Hammack, Kashkari, and Logan lean hawkish and have called for hikes; Waller and Williams lean dovish.
The key shift: Fed Chair Waller said on August 28 that if core inflation has not improved meaningfully, "there is still work to do." This reflects a tilt from the center toward the hawkish camp.
On the political side, Polymarket puts Democrats' odds of retaking the Senate at 51%, adding midterm pressure on Trump. But SWS notes that since 1983, the Fed has hiked in September of a midterm or re-election year 3 times — politics has never actually blocked a hike.
If they hike, what happens to markets?
SWS reviewed asset performance after all 51 hikes since 1990: U.S. equities typically see a short-term pullback followed by a medium-term recovery; cyclicals underperform; 10-year Treasury yields drift higher, yet the term premium actually declines.
The real dividing line is not whether the Fed hikes, but whether the forward rate path is revised upward. When it is, 10-year yields rise an average of 35 basis points over the next 20 trading days; when the path holds steady, yields fall an average of 5 basis points.
In plain terms = one hike is manageable; what scares markets is the signal that more are coming.
What is SWS's bottom line?
SWS believes that if a modestly above-consensus hike lands in September, markets may treat it as a "front-loading" — pulling forward a hike that was coming anyway over the next year — rather than a signal of a steeper path.
The reasoning: August payrolls were distorted by seasonal-adjustment noise, the labor market remains in "weak equilibrium," wage growth has not accelerated, and current inflation is structural rather than broad-based.
This means → if the September dot plot does not meaningfully raise the rate path, this hike's market impact could be limited — and the term premium may even edge lower. August CPI is the final checkpoint.
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