*****************************************************************************

* FIEND'S SUPERBEAR MARKET REPORT *

* September 16, 2026 *

* *

* e-mail: fiendbear@fiendbear.com *

* web address: http://www.fiendbear.com *

*****************************************************************************

Fiend Commentary
================

From Rate Cuts to Rate Hikes

It is worth remembering where we started.

When 2026 began, virtually nobody was talking about the Federal Reserve raising interest rates.

The debate was over how many times it would cut them.

The Fed had already reduced rates three times during the final four months of 2025. After leaving rates alone in January, futures markets were pricing about a 65% chance that another cut would arrive by June and nearly two additional quarter-point cuts before the end of 2026.

January CPI then came in softer than expected at 2.4%.

The inflation battle finally appeared to be winding down. Some forecasters thought the Fed could cut two or three more times during the year. The bigger question wasn't whether rates would go lower.

It was when.

That was February.

Seven months later, CME puts the probability of a rate hike above 90%.

What a difference a war makes.

The Year Went Into Reverse

The Middle East conflict changed the entire interest-rate discussion almost overnight.

Oil moved toward $100 and eventually beyond it. By late March, investors had largely abandoned expectations for 2026 rate cuts and were beginning to entertain something that had seemed almost absurd just weeks earlier.

The Fed's next move might actually be up.

Reuters reported in March that markets had gone from expecting two or three cuts to perhaps one—or even rate hikes—as the oil shock threatened to push inflation higher again.

By May, the transformation was nearly complete.

A Reuters survey found that most economists expected the Fed to remain on hold through the rest of the year. Less than half still expected even one cut.

Then Kevin Warsh arrived.

There had been considerable speculation that replacing Jerome Powell would produce a friendlier Fed for President Trump, who had spent months demanding lower interest rates. Warsh took over as chairman in May after Powell's term as chair ended, although Powell remained on the Fed board.

Markets initially expected Warsh to lean toward lower rates.

They didn't get them.

They didn't get higher rates either.

At Warsh's first meeting in June, the Fed left the federal funds rate unchanged at 3.50% to 3.75%. Nearly half of Fed officials were already projecting that a hike could eventually be necessary.

Warsh talked tougher as the summer progressed.

In July, he said anyone expecting the Fed to tolerate inflation above 2% would be disappointed.

Then came another Fed meeting.

And another hold.

This time three members of the FOMC dissented and wanted a quarter-point hike.

Warsh repeated that the Fed would not waver in its inflation fight while declining to actually raise rates.

The bond market was not particularly impressed.

The 30-year Treasury yield climbed above 5.2%.

WACO remained alive and well.

Then Everything Changed in One Week

Even as recently as last week, economists still weren't convinced Warsh would move.

A Reuters survey released September 9 found that 70% of economists expected no rate increase at this meeting.

Then came the inflation numbers.

Then oil moved higher again.

Then the Treasury market started coming apart.

By Monday, another Reuters survey showed 85% of economists expecting a hike.

Tuesday, futures markets put the probability of a quarter-point increase at 94.5%.

That is a remarkable change in only a few days.

Whenever market probabilities move that dramatically just before a Fed meeting, somebody inevitably wonders whether information has leaked.

Maybe.

But no leak is necessary to explain this one.

CPI remained at 3.4%.

Producer inflation came in hot.

Oil returned above $100.

The 10-year Treasury broke through 5%.

Several major Wall Street firms changed their forecasts.

And Fed officials had already shown in July that there was significant internal support for tightening.

The clues weren't exactly hidden.

The market appears to have simply decided that Warsh has finally run out of room.

Five Percent—Again

The 10-year Treasury moved above 5% again Tuesday, reaching its highest level since 2007.

That may be the strongest argument for a hike Wednesday.

Not because the Fed should take orders from the bond market.

But because the bond market is telling the Fed that investors are increasingly uncomfortable holding long-term U.S. debt at today's interest rates.

Higher inflation is part of it.

Higher oil is part of it.

Massive Treasury issuance is part of it.

The $40 trillion national debt is part of it.

And doubts about whether the Fed is willing to get ahead of inflation rather than chase it are another part.

Tuesday's move was particularly interesting because it happened while the probability of a Fed hike was approaching certainty.

Markets didn't say:

"Good. Warsh is going to hike. Problem solved."

They sold Treasuries anyway.

That sets up a fascinating Wednesday.

There are really three possible outcomes.

One is expected.

Two would be shocks.

Door Number One: Nothing

The first surprise would be the easiest decision politically and probably the hardest one for the markets to understand.

Warsh could do nothing.

The federal funds rate would remain at 3.50% to 3.75%.

There are arguments for waiting.

One month of inflation data doesn't make a trend.

Oil could fall sharply if geopolitical conditions improve.

Interest rates work with long lags.

And the 5% 10-year yield is already tightening financial conditions without any assistance from the Fed.

All true.

But imagine the market reaction.

Investors entered Wednesday assigning more than a 90% probability to a rate increase.

The 10-year has already broken through 5%.

Inflation remains well above the Fed's target.

Oil remains above $100.

Three FOMC members wanted a hike at the previous meeting.

And Warsh has spent the summer insisting that the Fed won't tolerate persistent inflation.

Then he does nothing.

Reuters noted Wednesday morning that currency traders believe a surprise hold could knock more than 1% off the dollar.

The bond reaction could be more important.

A hold might initially look bullish for Treasuries because short-term rates stay lower.

But if investors interpret the decision as evidence that the Fed is falling further behind inflation, long-term yields could move in exactly the opposite direction.

The Fed saves 25 basis points.

The bond market might add them instead.

That would be an interesting definition of monetary easing.

Door Number Two: The Obvious Answer

The second possibility is the one virtually everybody expects.

Twenty-five basis points.

That would raise the federal funds target to 3.75% to 4.00%.

It is the conventional central-bank answer.

Inflation has become uncomfortable, but not catastrophic.

Employment remains reasonably strong.

Oil creates additional inflation risk.

The bond market is asking for restraint.

Move one notch.

Then wait.

There is nothing inherently wrong with that approach.

The problem is that yesterday's market action raised an uncomfortable question.

What if 25 basis points isn't enough?

The 10-year Treasury already knows the Fed is probably hiking.

It went above 5% anyway.

That means investors may have moved past Wednesday's decision and started worrying about what comes next.

Morgan Stanley now expects another hike in December. JPMorgan does too. Futures markets are pricing several additional increases into next year.

If Warsh hikes 25 basis points and then delivers a press conference emphasizing caution, patience and uncertainty, the bond market may hear:

One and done.

That could be exactly what it doesn't want to hear.

On the other hand, a quarter-point increase accompanied by a clear message that additional tightening remains available could accomplish considerably more.

Sometimes the words following a rate hike matter more than the hike.

Warsh dislikes forward guidance.

Wednesday may test how long he can avoid it.

Door Number Three: Fifty

Then there is the surprise nobody expects.

Fifty basis points.

This would put the federal funds rate at 4.00% to 4.25% in one shot.

There is almost no market expectation for such a move.

Which is precisely why it would matter.

A half-point hike would tell the bond market that the Fed isn't merely catching up.

It intends to get ahead.

It might also be the one decision Wednesday powerful enough to change the psychology of the long end immediately.

That does not mean the 10-year would automatically fall. Markets are rarely that simple. Short-term yields would likely jump, the dollar could strengthen and stocks would have to rapidly reprice an interest-rate path nobody expected.

But long-term Treasury investors might finally hear something they haven't heard from the Fed all summer:

Enough.

A 50-basis-point hike would also move policy sharply opposite to President Trump's publicly stated preference. Trump said again over the weekend that the United States should have the lowest interest rates in the world.

Instead, his Fed chairman would be delivering the largest increase in years.

That would make for an interesting afternoon in Washington.

The Ghost of Powell

There would also be considerable irony.

Trump spent years criticizing Jerome Powell for moving too slowly, although usually because Trump wanted rates lower.

Warsh was supposed to represent a different approach.

Now Warsh faces the classic central-bank problem that has trapped Fed chairs for generations.

Wait too long.

Inflation doesn't cooperate.

The bond market loses patience.

Then take action after markets have already forced your hand.

That doesn't sound terribly revolutionary.

Warsh's great promise was that the Fed would communicate less, rely less on endless forward guidance and return monetary policy to something closer to first principles.

Fine.

Wednesday provides an excellent opportunity.

Inflation is above target.

Oil is above $100.

Long-term rates are near two-decade highs.

The economy is still growing.

What do those first principles say?

We are about to find out.

From Two Cuts to Four Hikes

Perhaps the most remarkable thing about Wednesday isn't whether rates go up 25 basis points.

It is how completely the entire monetary-policy narrative has reversed.

January:

The market expected nearly two rate cuts.

February:

Soft inflation reinforced hopes for additional easing.

March:

War and $100 oil began destroying those expectations.

May:

Most economists expected no changes at all.

June:

Warsh's first meeting ended with rates unchanged, although nearly half the Fed could already see a possible hike ahead.

July:

Three Fed officials voted to hike.

Last week:

Most economists still expected another hold.

Today:

Markets are pricing the first increase at better than 90%, with additional hikes increasingly expected afterward.

A year that began with investors asking how low rates would go could end with them asking how high they need to go.

That is not a minor adjustment.

It is a complete reversal.

Now Comes the Easy Part

Yesterday we suggested that hiking rates might actually be the easy decision for Warsh.

Today it almost certainly is.

Twenty-five basis points satisfies the consensus.

It demonstrates some concern about inflation.

It avoids shocking Wall Street.

And it allows Warsh to say he acted without committing to a full tightening cycle.

Nobody gets everything.

Nobody is completely surprised.

Central bankers usually like that.

But the Treasury market may no longer care what central bankers like.

The 10-year has crossed 5%.

The 30-year is near 5.4%.

Oil is above $100.

Inflation is moving in the wrong direction.

And investors who lend Washington money for decades are demanding considerably more compensation than they did only a few months ago.

A 25-basis-point hike Wednesday may calm things down.

Or the bond market may simply ask:

Is that all you've got?

No hike would answer that question one way.

Fifty basis points would answer it another.

Twenty-five leaves us exactly where we have been all summer.

Waiting to find out whether Warsh means what he says.

By this afternoon, WACO either gets another chapter—or finally gets put on hold.

---

Weekly Market Summary Page
[Return to the Fiend's SuperBear Page]