The Fed’s Sept. 15-16 meeting is fast approaching, and the rate-hike chatter continues to get louder.
Traders priced an 86% chance of a rate hike on Sept. 14, according to CME FedWatch, CNBC confirmed. After months of indecisive signaling, Fed Chair Kevin Warsh’s rougher inflation rhetoric put tightening in focus. That said, now a Citi strategist sees a major twist in how stocks might respond.
At Jackson Hole on Aug. 28, Warsh made it clear that patience has its limits, warning policymakers needed more confidence that inflation was moving toward their 2% target.
“Otherwise, we have work to do,” he said.
August’s inflation report did little to soothe the pain. Consumer prices increased 0.4% monthly and 3.4% annually, while core prices rose 0.3% from July. Gasoline helped drive the headline increase, which significantly complicated the Fed’s task as households absorbed elevated costs.
That has investors weighing whether another hike would contain inflation or add new pressure to an already-uneven economy.
In a CNBC interview, Citi strategist Scott Chronert argued that a larger rate hike could reassure investors and help stocks rise. He isn’t predicting a half-point bump, but he argues that a bigger rate hike wouldn’t necessarily be bad news for the market.
Citi sees a bullish twist in a bigger Fed hike
Chronert’s argument depends on whether the Fed can reassure investors by raising rates without hitting the brakes too hard on the economy.
With Treasury yields around 5%, according to CNBC, he suggested a preemptive hike “could anchor the longer end of the curve and put a lot of this current short-term uncertainty behind.”
The logic is that if investors expect inflation to be contained, they might demand lower compensation for holding long-term bonds. Lower yields will ease pressure on stock valuations, offsetting some of the damage from higher short-term rates.
More Fed:
- J.P. Morgan drops Fed rate bombshell over Warsh, inflation
- Fed interest-rate decision rocks Wall Street’s inflation fears
- BofA says Fed hike today would be one for the books
Nevertheless, Chronert questioned whether a quarter-point increase might deliver the “bullish shock effect” of a half-point move.
“Now, I’m not calling for 50. That’s not the house view,” he stressed, adding that fundamentals didn’t support a hike.
For perspective, Reuters indicated that Citi’s year-end S&P 500 target is at around 8,100, about 6% higher than the index’s recent close near 7,657. However, Chronert argued in a separate Sept. 11 note shared with TheStreet that the target looked aggressive as oil and bond yields climbed.
The problem with his argument is simple: Higher interest rates can’t fix oil shortages.
If rate hikes hurt company profits while long-term borrowing costs remain elevated, stock prices might fall. And for his bullish outlook to work out, investor confidence needs to improve more quickly than the economy weakens.
Bloomberg / Getty Images
Wall Street’s rate calls turn hawkish, but stock targets stay bullish
Citi’s view underscores a bigger shift on Wall Street.
More analysts believe stocks could rise even as interest rates rise. The disagreement, though, is over whether Fed rate hikes will reassure investors, slow the economy, or do both.
Goldman Sachs is perhaps the closest to Chronert’s reasoning.
The bank is now expecting a quarter-point September hike, partly because standing pat might unsettle markets positioned for tightening. Yet Goldman is still anticipating a couple of cuts in 2027. It points to a credibility-driven increase instead of an unavoidable, prolonged tightening cycle.
Goldman’s 8,000 year-end S&P 500 target sits slightly behind Citi’s 8,100. Both point to further gains, but neither entitles investors to believe elevated borrowing costs are inherently bullish.
Earnings and confidence need to offset the drag.
UBS Global Wealth Management makes the earnings argument more emphatically. It forecasts quarter-point hikes in September and December while targeting 8,100. At the same time, the bank expects S&P 500 earnings growth of 25% this year and 14% next year, arguing that strong growth can efficiently absorb modest tightening.
On the flip side, Barclays is more guarded on valuations, as reported by Reuters. It expects September and December hikes, but the bank bumped its year-end index target to 7,950 after raising its 2026 earnings forecast to $365 per share. It also remains cautious about inflation, financing expenses, and the durability of AI spending.
JPMorgan also expects a couple of quarter-point hikes and targets 8,000, as Reuters reported. This underscores how tighter policy hasn’t automatically displaced bullish stock-market forecasts.
Citi’s differing view is that the decisive tightening might actively help valuations by calming long-term yields.
Barclays offers a counterweight, questioning how, even with improving profits, a restrained multiple may be warranted.
The big test is whether borrowing costs could stabilize before materially weakening earnings.
