Higher Treasury yields, stubborn energy prices, and rising global tensions are putting the Fed in a tough spot. To help break this down, we are joined by Kevin Ford, FX and Macro Strategist at Convera. Kevin, great to have you with us.
Hey Johnny. Thanks for having me back.
The Fed already raised rates last month and with yields climbing and oil still high — is another hike coming this month or will the Fed wait until December?
Our base case is that the Fed will pause in October and then raise rates again in December. The September hike started this tightening cycle and the message since then has been one of patience on timing. Direction is really clear — the Fed minutes showed that most officials still expect another hike by year end. At the same time, we got softer than expected labour market data and recent inflation revisions have reduced the urgency for a back-to-back move. The bond market is already doing some of the Fed’s work — Treasury yields have risen sharply, the dollar has strengthened, and financial conditions have tightened. That gives the Fed an incentive to watch how the economy absorbs the September hike before moving again. But I do not think it will be a comfortable pause — oil remains elevated, service sector cost pressures are persistent, and the economy is still growing at a decent pace. October is probably a hold, but a hawkish hold. December remains very live.
Let’s talk about Wednesday’s inflation report. What number are you watching closely and what reading would really change the picture for the Fed?
The headline number will attract lots of attention — it is expected to jump by roughly 0.6% in September, much of it reflecting higher gas prices. The annual rate will hit around 3.7%. The Fed will look through part of that initial energy shock unless it starts spreading into transportation, wages, and broader service prices. The key number for us is the monthly core CPI — the forecast is close to 0.2%. That would take annual core inflation to roughly 2.5%, which would support an October pause. The composition will be really important — we will be monitoring services excluding housing, shelter inflation, and tariff-sensitive goods like vehicles. If those categories accelerate together, the Fed cannot dismiss this as an oil story only. A 0.2% core reading would keep October largely off the table. A stronger 0.3% would create a more uncomfortable debate, particularly if the details are broad-based. But one benign report may delay the Fed — it may not stop it. Officials are increasingly treating another hike as insurance against persistent inflation.
Fed Chair Warsh is speaking on Thursday. What do you need to hear from him?
I would listen for answers to three questions. First — is October generally a pause or is the decision still live if tomorrow’s CPI surprises on the upside? Second — does Chair Warsh see the rising long-term yields as a substitute for further Fed tightening, or simply a reflection of stronger growth, capital demand, and geopolitical risk? Third — is the Fed thinking about one final insurance hike or the beginning of a longer tightening sequence? The language around financial conditions will be especially important. Bond yields have surged, but equity valuations remain high and the Fed’s broader measures do not yet suggest conditions are deeply restrictive. For investors, the sensible approach is to think in scenarios rather than chasing headlines. A harder core CPI followed by a hawkish Warsh would favour higher front-end yields and renew dollar strength — the dollar hit its highest level in 2026 just yesterday. A softer core number and greater concern about financial conditions from Warsh would pull yields lower. Wednesday gives us the inflation data. Thursday tells us how the Fed will read it. Together those two events will determine whether we are looking at a December hike — futures markets are currently implying 80% odds — or higher for longer into 2027.
Kevin, thank you so much for joining us today.
