• Societe Generale (GLE.PA) strategists expect the Fed to raise rates by 25 basis points in September and December, with a possible third move in March, if inflation remains too high.
  • Chair Warsh's Jackson Hole speech signaled a hawkish shift, emphasizing price stability over supporting the labor market.
  • Markets have repriced odds of a September hike to around 65%, up from about 41% a week earlier, after hot PCE data.

A Hawkish Pivot from the Fed

Federal Reserve Chair Kevin Warsh used his Jackson Hole address on August 28 to deliver a clear message: inflation is still too high, and the central bank is ready to act. With the labor market near full employment, Warsh said policymakers would have "work to do" if underlying price pressures don't convincingly return to the 2% target. That's a shift in emphasis from supporting growth to containing prices, and markets noticed.

Societe Generale's strategist Jan Groen took the cue. In a note to clients, he laid out a conditional forecast: three 25-basis-point hikes over the next two meetings and possibly one more in March, bringing the target rate 75 basis points higher by spring. Groen's call hinges on inflation failing to cool fast enough. "If the data continues to surprise to the upside, the Fed will have little choice but to act sooner rather than later," he said.

Sticky Inflation and Market Repricing

The latest data supports the hawks. July's headline PCE—the Fed's preferred measure—came in at 3.7% year over year, unchanged from June and above the 3.6% consensus. Core PCE held at 3.3%. That's the 65th consecutive month above target, a streak that's increasingly hard to ignore.

Fed funds futures have repriced dramatically. As of September 1, traders saw a roughly 65% chance of a September hike, up from 41% a week earlier. Barclays (BCS) has independently adopted a similar base case, though some economists still argue September is too soon, pointing to potential moderation in August core CPI.

The Geopolitical Wildcard

Adding to the inflation headache is the renewed U.S.-Iran tensions, which have pushed oil prices higher. A sustained energy shock could feed through to broader prices, making the Fed less inclined to wait. But rate hikes can't solve supply-side problems — they can only dampen demand. That's a delicate balancing act.

Internationally, Japan is also moving toward tighter policy, with a Reuters poll showing 57% of economists expect a Bank of Japan increase in September. A coordinated global tightening could amplify the impact on financial conditions.

For investors, the message is clear: higher rates are back on the table. That supports the dollar and short-duration bonds, but pressures long-duration debt, growth stocks, and real estate. Households face the prospect of elevated borrowing costs on mortgages, auto loans, and credit cards, while businesses with heavy debt loads may see refinancing costs rise.

The Fed's next move will hinge on upcoming employment and inflation data. Warsh has kept his options open, but the window for a September hike is narrowing. If August inflation comes in hot again, the first move could come sooner rather than later. If it cools, the Fed might hold off until December. Either way, the era of low rates is firmly in the rearview mirror.