FOMC Scenario Work Charts Four Paths and Casts a Rate Hold as Unlikely

The first of the three tightening paths has the committee raising rates by 25 basis points to address above-target inflation while the Chair offers no forward guidance. In that case the analysis expects only a modest decline in front-end rates, because the absence of guidance leaves the subsequent policy path ambiguous rather than clearly tighter or looser than what is already priced.

A second hike variant pairs the 25 basis point increase with guidance that the 75 basis points of risk-management cuts delivered in 2025 were unnecessary, a judgment the analysis attributes to the Chair's view that labor markets are at full employment. Under that path, the front end of the curve temporarily converges toward pricing in 75 basis points of total hikes.

The fourth path is built on the Chair acknowledging that policy is not currently restrictive and that large-scale investment in artificial intelligence could lift productivity, trend growth and the neutral policy rate. The analysis observes that markets appear somewhat priced for that outcome already, though the 1y1y rate has returned to near its cycle highs.

Read together, the four paths treat inaction as the outlier rather than the base case: three of them involve an increase in the policy rate, and the hold is explicitly described as a very low-probability event on the grounds that it would damage the institution's credibility. That shifts the substance of Wednesday's meeting away from whether the committee moves and toward what accompanies the move, since each variant produces a different response in short-dated yields.

The analysis is explicit about what would overturn its premise: a decision to hold rates with dovish guidance would remove the hike-risk framing entirely. Until the committee's statement and the Chair's remarks are published, each path remains conditional rather than predictive, and the projected moves in OIS rates and 2-year yields apply only within the specific scenario that generates them.

Thu 10 Sep · 23:59 UTC · 6 reports