No, this is not just a question to ask yourself when visiting a mountain region! This is the key questions market participants are asking themselves this week regarding the likely outcome of the Federal Reserve’s interest rate decision next week Wednesday.

In the wake of a somewhat strong jobs report last Friday, markets are now pricing in a 70% probability that the Federal Reserve will raise the Fed Funds rate next week. This is a sharp turn of events from earlier this year when the consensus was two rate cuts this year. Now we’re moving in the other direction.

Why would the Fed hike? As noted in Fed Chair’s speech in Jackson Hole, the Federal Reserve does not view monetary policy as restrictive, which is another way of saying that the current level of interest rates is not slowing down economic growth in any fashion. This is resulting in a strong labor market but also stubborn inflation.

Consumer inflation for August will be reported tomorrow after this publishes. Many believe this report will either provide enough cover for the Fed to hold – or will force their hand. This dependence on a single report is at odds with what Warsh has said about how the Fed should work but at the end of the day, the Fed is relying on data and this report will be the most recent/relevant data point. Wholesale inflation (Producer Price Index) released today came in line with forecasts but did not show any signs of a slow down. Inflationary concerns remain front and center largely due to ongoing geopolitical factors – lingering conflict in the Middle East and escalation of various trade wars – both of which may not be fully reflected in August inflation data either.

In theory, a rate hike will increase the cost of money/financing and should help slow down the economy – putting a damper on inflation. However, it is hard to imagine how a 0.25% increase in rates will relieve the main consumer pain points (like oil and resulting airfares – which is moving on overseas conflict) or slow down AI cap ex spending by large multinational companies (who are not overly reliant or sensitive to interest rates as they are spending free cash flow for the most part).

Another wrinkle in all of this is timing – after this rate decision, there is one more that falls only a few days before the midterm elections. As you may recall, this Presidential administration had been critical of the former Fed Chair Jerome Powell and repeatedly pressured him to cut rates. While there has not been the same public pressure campaign on Warsh, such dialogue seems likely as the midterms approach. This might be the Fed’s chance to “verify” their independence from the Executive Branch.

The other thing to keep in mind is the Treasury Department and Treasury Scott Bessent’s mission to control interest rates (via buybacks of US debt). Bessent was quoted this week as saying “I am the house now” – implying an asymmetrical trading environment as one may find in a casino. He was discussing the US government’s role in helping the Japanese yen when he made that statement – but one can infer that same confidence remains in the ability to execute on the buybacks here at home.

Lastly, the actions of other central banks cannot be ignored. European Central Bank raised rates by 0.25% today – we will soon find out if the US follows suit.

As always, markets remain “must see tv” in 2026. Stay tuned for today’s CPI print and the Fed’s decision next week. While the magnitude of the move (if it happens) might not be significant, it may be far more meaningful in terms of underlying message and likely path from here.

Onward we go,