Fed Credibility on the Line: Rate Hike Risk Higher Than Markets Think

The Federal Reserve's credibility is on the line as it prepares to make its next move in the battle against inflation. With only four meetings left this year, including the upcoming decision, markets may be underpricing the risk of a rate hike.

Since the June FOMC meeting, policymakers have delivered an unequivocally hawkish message, and inflation remains well above target. The labor market continues to look tight, while goods prices are no longer providing the offset they once did.

The Fed's reaction function may be changing under new leadership, leaving open the possibility that significant policy changes can occur at intervening meetings. This could trigger a violent repricing at the front end of the Treasury curve and another leg higher in the US dollar.