With market-implied odds of a September rate hike nearing 90% according to CME data, and the Treasury market already pricing in such a move, CICC believes that a hike is not necessarily a bad thing — unless it becomes a series of hikes. Conversely, refraining from a hike is not necessarily good news either. On key assets, apart from relative optimism around US equities, especially tech stocks, most other assets have already fully priced in a September increase.

US Treasuries could see short-end yields rise while longer-dated term premiums initially pull back, potentially leading the entire long-end curve to gradually peak and decline. US stocks, however, are not seen as vulnerable, with short-term turbulence potentially offering better entry points. A Fed hike would rebuild market trust and lend support to the US dollar, and vice versa. For gold, the asymmetry favors a no-hike scenario, and the metal currently resembles a call option with uncertain upside potential.

Whether the Federal Reserve should raise rates has been the most divisive, volatile, and perplexing question over the past month. Chair Warsh's ambiguous remarks in late July regarding the inflation target and the reflexive relationship with market rates triggered a Treasury market storm, one so severe that even direct Treasury buybacks by the US Treasury failed to restore calm. The core issue is not the digestibility of increased bond supply, but rather concern that the Fed cannot offer the reassurance needed for investors to comfortably hold long-dated Treasuries. From that moment onward, the debate over hikes transcended inflation and data alone.

At the Jackson Hole conference in late August, Warsh was compelled to deliver hawkish remarks, re-emphasizing that the 2% inflation target and fighting inflation are non-negotiable Fed responsibilities, in a bid to stabilize market expectations. This did have some effect, with term premiums falling by 20 basis points from their peak. From the perspective of safeguarding Fed credibility, raising rates is the optimal choice, unless subsequent data consistently comes in below expectations. Unfortunately for the Fed, data has not cooperated, with non-farm payrolls, PPI, and CPI all exceeding forecasts, gradually backing the central bank into a corner and forcing it to deliver on its hawkish promises.

According to CME data, the market now prices in nearly a 90% probability of a September hike. The Treasury market is also pricing in this move: since late August, the 2-year yield has climbed 32 basis points to 4.66%. The 10-year yield at 4.96%, minus a 76 basis point term premium, implies an interest rate expectation of 4.18% — 60 basis points above the current benchmark rate of 3.5%, implying more than two rate hikes embedded in expectations. Therefore, the relevant question has shifted from "whether to hike" to "what happens after the hike."

In CICC's view, the market often avoids preparing for a hike out of fear of its impact, only to over-worry about the fallout once a hike appears inevitable. This overreaction is unwarranted; what matters is not the hike itself but the reason behind it. From a fundamental standpoint, the decision appears borderline, but from a Fed credibility standpoint, raising rates is preferable. Had similar comments at Jackson Hole come from Powell, a September hike would be almost certain. At Jackson Hole, Warsh reiterated the 2% inflation target and stressed the Fed's duty to focus on price stability in unequivocal terms.

However, Warsh is not Powell; his famously ambiguous style stands in stark contrast. He believes excessive market reliance on Fed guidance creates a "hall of mirrors" effect and does not advocate full communication with the market. As a result, market expectations remain volatile — Weller's dovish remarks in early September even dampened hike expectations, as he pointed to signs of cooling inflation and argued energy prices had not yet spread to other components, suggesting a need to "give disinflation a chance." Fundamentally, the data tells a mixed story; even with inflation and other indicators beating expectations, evidence of strength is not overwhelming.

August inflation was mainly driven by oil prices, airfares, and hotels — factors unlikely to persist. CICC estimates that unless oil prices stay above $95 per barrel, CPI inflation will likely ease from the current 3.4% year-over-year level by year-end. US growth is also K-shaped, though less extreme in its divergence, and at such elevated rates, much of the traditional demand side will quickly feel cost pressures, especially in housing. Fundamentals are not the decisive factor here; Fed credibility is, making a hike the preferred course of action.

The "deliberate ambiguity" at the July FOMC threw market expectations into disarray, pushing term premiums from 0.65% to 0.9% and forcing the hawkish commitment at Jackson Hole. If data weakened, the Fed might have room to maneuver, but with non-farm payrolls and inflation exceeding expectations, the Fed found itself backed into a corner. While these short-term indicators have limitations, they are all that is available before the FOMC meeting. If the Fed were to "forcefully hold," how would the market interpret its earlier hawkish signals? It would likely only deepen the credibility crisis and lead to further loss of control in the Treasury market.

Importantly, a brief "preventive hike" often functions as a "sell the rumor, buy the news" event. The market habitually avoids preparing for hikes out of fear, only to overreact when one becomes unavoidable. In analyzing the impact of hikes, the reason matters more than the hike itself. A sustained and significant hiking cycle, as seen in 2022 when the Fed raised rates by 525 basis points over 16 months in response to post-pandemic supply-demand mismatches and oil-driven inflation, would impose longer and larger shocks through higher financing costs and tighter financial liquidity. Conversely, small or preventive hikes, because of their limited magnitude, cause minimal disruption, and since expectations are typically pre-priced, the actual move often signals an event risk clearing.

Historical precedents are instructive. In 1997, during a period of rising but not out-of-control inflation, constrained financial conditions, and robust tech-driven growth, the market had already digested hike expectations before the March FOMC. Consequently, Treasury yields peaked and fell shortly after the announcement, and US stocks resumed their uptrend within about a week. Conversely, the "preventive cuts" of 2019, 2024, and 2025 followed a similar script: despite some growth headwinds, there was no risk of stall, requiring only modest policy adjustments for support. With expectations pre-priced, the trading narrative quickly shifted from "easing expectations" to "growth improvement."

Treasury yields and the dollar index bottomed out and rebounded soon after those cuts, while gold performed better before the cut than after, unless grand narratives like those of 2025 significantly boosted prices. US stocks continued to rise post-cut as easing transmitted to earnings. Hong Kong stocks benefited to some degree from improved denominator effects, but domestic fundamentals were decisive, as seen in September 2025 when a cut led to a brief surge, which also became the cycle's peak. In contrast, multi-hike cycles like 2022-2023 brought deeper, more prolonged market adjustments. With CPI surging past 9% in June 2022, the Fed was forced to hike rapidly, accumulating 525 basis points by July 2023, keeping pressure on asset prices far longer. The 10-year Treasury yield only peaked in October 2023, 278 basis points above cycle lows, and rate expectations peaked in March 2023, up 171 basis points. The S&P 500 and gold bottomed in October and November 2022, respectively, with drawdowns of 18% and 16%, corresponding to the confirmation of the US inflation inflection.

Focusing on the most intense tightening phase from March to December 2022, excluding the support AI trends provided to risky assets since 2023, reveals that all major assets except cash and short-dated Treasuries declined. Currently, the foundation for sustained, aggressive hikes does not exist unless oil prices spiral out of control. Unless oil remains at $95 or higher, pushing CPI inflation up or preventing it from falling, the K-shaped US economy and high rates suppressing traditional demand make it unlikely the economy can withstand a prolonged tightening cycle, creating a reflexive constraint against repeated hikes. Traditional demand is already weakening under high rates: the August ISM manufacturing PMI fell, with new orders dropping from 56.7 to 53.7, and rate-sensitive housing data turned down again. IT and financial sector layoffs may also disrupt consumption.

AI, as a major growth engine, is becoming more sensitive to financing conditions. As cloud providers' free cash flow turns negative, their reliance on external financing is growing. While ROIC at 20% still exceeds WACC at 9%, a significant rise in financing costs could diminish capital expenditure appetite, particularly amid temporary bottlenecks in AI demand. Scenarios that could trigger multiple consecutive hikes include: first, runaway oil prices persistently staying high; in the base case, oil is expected to average $80-90 per barrel in H2, with CPI falling to around 3.0% by year-end. But if oil averages $100 or more, CPI could exceed 3.6% by year-end, adding significant pressure on the Fed. Second, an unexpected resurgence in AI capital expenditure: this could push up tech hardware prices and core inflation, as seen in August's PPI with electronics as a key contributor. Given AI already accounts for 40% of US GDP growth, a dramatic acceleration in capex, spreading to other sectors, would make it difficult for the Fed to justify rate cuts on weak fundamentals grounds.

CICC's outlook diverges from market consensus: it does not view a hike as a catastrophic event. A hike is not necessarily detrimental unless it becomes a series of hikes; conversely, not hiking is not necessarily beneficial. While a hike can cause turbulence, a brief, pre-priced move often behaves as a "sell the rumor, buy the news" event, potentially offering better entry points. Conversely, a forced hold may provide short-term relief but create more problems down the road. Across various assets, the implied number of hikes over the next year is pronounced: rate futures (3.7), Treasuries and copper (1.7), gold (1.2), the Fed dot plot (0.7), Dow Jones (0.6), S&P 500 (0.2), and Nasdaq (-0.4). Compared to the end of the July FOMC, the 10-year yield expectation has risen 15 basis points, and the 2-year by 30 basis points. This suggests that, apart from US equities — particularly tech — most assets have already fully priced in a September hike, similar to the situation before the March 1997 hike.

For Treasuries, short-end yields should rise, long-end term premiums decline initially, and long-end yields may gradually peak and fall. A single hike corresponds to a fair value range of 4.5%-4.7%, and with 1.7 hikes already priced in, the "preventive hike" scenario is well reflected. A hike that restores confidence would narrow term premiums, making Treasuries a compelling risk-reward. For US stocks, CICC is not bearish; it raised its S&P 500 target to 7800-8000 in June. The index has stalled at these levels due to a lack of AI-driven earnings catalysts and macro headwinds like hikes. Once the hike is realized, if AI gains new momentum, there is upside; short-term turbulence may offer better buying opportunities. For the US dollar, a hike that restores market trust would provide support, and vice versa. CICC's dollar model projects the dollar index trading in a 96-98 range in H2, without significant weakness.

Gold presents more upside in a no-hike scenario; it currently resembles a call option with uncertain upside potential. Static calculations based on Treasury yields and the dollar place support around 4400-4600. Unless hikes become consecutive, downside pressure on gold remains containable, but upside will require more grand narratives to unfold. A Fed that refrains from hiking would fuel narratives of lost trust and de-dollarization, while a hike undermines such narratives, limiting upside until fresh catalysts emerge.