Will the Federal Reserve finally move off the sidelines?

ANTHONY SAGLIMBENE – CHIEF MARKET STRATEGIST, AMERIPRISE FINANCIAL

WEEKLY MARKET PERSPECTIVES —  September 14, 2026

Will the Federal Reserve finally move off the sidelines?

All eyes turn to the Federal Reserve this week. Notably, policymakers haven’t changed interest rate policy since December 2025. Thus, this week’s two-day meeting follows five consecutive meetings with the fed funds target range parked at 3.50%-3.75%. But given current inflation dynamics, a solid employment backdrop, and a new Fed Chair looking to establish credibility, Wednesday’s rate decision carries the highest odds of a hike markets have seen all year. As such, we believe investors should be prepared for the committee to act this week, even if there’s still a small chance Fed Chair Warsh and company decide to stand pat.

Simply, Friday's inflation report pushed the odds higher that the Fed will finally move off the sidelines. The headline Consumer Price Index (CPI) rose +0.4% month over month in August and held at +3.4% year over year. In addition, core CPI, which strips out food and energy, rose +0.3% for the month after a +0.2% gain in July, and one-tenth above the consensus estimate. However, on the year-over-year rate, core CPI dipped to +2.4% in August, down from +2.5% in July. Yet, with core CPI again holding above the Fed’s +2.0% target last month, traders responded by pushing the probability of a quarter-point hike this week to over 85% on Friday, up from roughly 70% before the release. That said, the Committee that voted nine to three to hold rates steady in July can point to at least “steadier” inflation levels (if they want to) and as cover to wait another meeting before acting, in our view.

That’s because energy is doing most of the damage on the inflationary front at present, something the Fed can’t directly influence. For example, gasoline prices rose by +3.9% in August and accounted for more than a third of the entire monthly headline CPI increase. Notably, over the last twelve months, gasoline prices are up +27.4%, and fuel oil is up +52.0%. In our view, the uptick in inflation pressures is energy-driven and a supply problem rooted in a geopolitical issue. A quarter-point move in the fed funds rate won’t address this issue.

Nevertheless, the still-strong labor market may give officials some cover to move rates higher if they choose to do so this week. For example, August payrolls came in at +162,000 against a consensus of +55,000, with the unemployment rate holding steady at 4.1% and wage growth at +3.1% year over year. Over the last three months, job growth has averaged a very healthy +71,000 per month, suggesting the labor market is more than capable of absorbing a quarter-point rate hike should policymakers decide to get ahead of higher energy prices filtering into core inflation.

As the chart above shows, in June, Fed officials projected core PCE inflation at +3.3%, headline PCE at +3.6%, unemployment at 4.3%, and a year-end median fed funds rate of 3.8%. Interestingly, core inflation so far is landing within officials’ forecasts, and headline inflation is running a little hot (mostly because of energy, which, as we noted above, the Fed can’t control). Interestingly, unemployment, which was at 4.1% at the end of August, is coming in below even the lowest projection any official submitted in June. Overall, the Fed's inflation forecast is holding up, while the labor market has likely remained tighter and stronger than most expected. We’ll soon see where policymakers pencil in their updated forecasts this week when the Fed’s Summary of Economic Projections is updated alongside their rate decision.

It’s also worth pointing out that the Fed doesn’t target CPI specifically when setting policy, which is what rate odds reacted to on Friday. Instead, the Fed targets the Personal Consumption Expenditures (PCE) Index, which weights housing costs (for example) far less heavily and adjusts for the way people actually shop when prices rise. Notably, core CPI stood at +2.4% in August, while the Fed's preferred gauge sat higher in July at +3.3%. Hence, while Friday's CPI report looked encouraging on the surface, the measure the Fed actually uses to judge whether it has done enough on inflation remains well above target.

Also, since CPI and PCE both remain above target levels, and given that Friday's CPI data didn’t change the inflation narrative much, traders quickly priced in that the Fed has the runway to raise rates on Wednesday. At the end of the day, the Fed has seldom disappointed markets when the odds of a rate hike or cut are this high, suggesting again that investors would be best served by assuming policy rates are moving higher this week.

With that backdrop in place, what other items should investors be watching for beyond the Fed's rate decision? We would start with the updated economic projections. Specifically, we believe the 2026 rate projection, or median dot, is the number that matters most for the market right now. June projections placed that dot at 3.8%, which sits halfway between holding rates steady and delivering one hike. Interestingly, that split tells you how evenly divided the Committee was three months ago.

So, watch where the dot lands this week. If it shows one hike for the year, officials view Wednesday's likely move as the last of 2026. If it shows two (which we think it will), they expect to move again before year-end, with only October and December meetings remaining to do it. Interestingly, futures markets are already priced for two quarter-point rate hikes by December, taking the fed funds rate from the upper bound of 3.75% today to 4.25%. The path traders expect is a move on Wednesday, a pause in October (ahead of the November election), then a second hike in December. If the Fed's own projections show only one hike instead, something will have to give. Either shorter-term bond yields fall back as traders unwind the December move, or the Fed eventually follows through and validates the market pricing. We believe either outcome could create some volatility over the coming days and weeks. Investors should also watch the long-run projections and officials' views on where rates will settle once conditions normalize. A further increase in longer-term projections would suggest the Committee believes borrowing costs could stay structurally higher.

But under Fed Chair Warsh, these projections come with new wrinkles. Warsh has spent his first months on the job preparing to reduce what the Fed tells markets in advance. Already, statements have gotten shorter, and July's statement was nearly identical to June's. And one participant even declined to submit a rate projection in June. Want to venture a guess who that was? In our view, these small actions are consistent with Warsh’s overarching view that officials should say and forecast less to the public. Importantly, regarding this week's rate projection updates, if an important participant again sits out, the published median dot may not fully reflect the decision-maker's view. All this said, over the coming months, we do expect a clearer view of how Warsh intends to communicate policy when findings from his current task forces are completed.

Bottom line: Investors should plan for a quarter-point rate hike this week. It's pretty much baked in, and there’s little risk for officials to do so. Underneath the energy noise, the fundamental picture remains steady. Core inflation is tracking right where the Committee projected it in June, payrolls beat handily in August, and unemployment sits below where the Fed projected the level in June. In our view, this economy can handle one or two quarter-point rate hikes, and policymakers may well decide that getting ahead of energy bleeding into core inflation is worth the effort. Importantly, the recent move higher in long-term yields will likely tighten financial conditions over time, possibly helping to bring down core inflation pressures. We suspect Warsh would be on board with such a dynamic as long as tighter conditions lead to an orderly decline in price pressures and avoid large growth disruptions.

The week ahead:

• In addition to this week's closely watched Fed decision, August retail sales on Wednesday will offer an important read on whether consumer spending is holding up against higher energy prices and weakening sentiment.
• Other data releases this week include the September Empire State Index on Tuesday, housing starts, building permits, Philadelphia Fed manufacturing on Thursday, and industrial production on Friday.
• Earnings are light, with Lennar reporting on Wednesday and Carnival reporting results on Thursday.

These figures are shown for illustrative purposes only and are not guaranteed. They do not reflect taxes or investment/product fees or expenses, which would reduce the figures shown here. An index is a statistical composite that is not managed. It is not possible to invest directly in an index. Past performance is not a guarantee of future results.