Fed funds futures put a 92% chance on a rate rise this week, and J.P. Morgan Asset Management has moved to expect one.
David Kelly's own reading of the economy does not support it. Three-month average payroll growth is 71,000, August wage growth was the weakest since May 2021, and the ten-year inflation expectation priced into the Treasury market has moved 0.11% all year. He expects the hike anyway, and the reason is what the Fed stopped saying rather than what the data started showing.
"And this is where the Chairman has effectively painted himself into a corner."
Kelly is chief global strategist at J.P. Morgan Asset Management and heads its global market insights strategy team; this is the weekly note he publishes for the firm's clients ahead of the week, and it changes the house call two days before the meeting.
The full episode is covered here so you can skip it.
Here are the 9 calls that matter.
👤 Speaker: David Kelly, Chief Global Strategist at J.P. Morgan Asset Management and Head of its Global Market Insights Strategy Team
📰 Published: 14 September 2026 on Notes on the Week Ahead
🟣 Apple Podcasts | 🔗 Episode page | 🔗 Show notes | ⏱️ 11 min
Key Takeaways
The house call changed to a hike, and the reason given is credibility rather than inflation
Futures price a 92% chance of one, and Kelly says failing to deliver would cost the chairman and the committee seriously
The evidence on the economy points the other way on almost every measure he checks
Three-month average payroll growth of 71,000, wage growth of 3.1%, and a labor force 973,000 smaller than a year ago
The bond market has not repriced inflation, whatever oil has done
The ten-year expectation implied by Treasuries against inflation-protected bonds is 2.36%, up 0.11% since January
Only 11 of the 18 people who drew the June dot plot can vote this year, and Kelly counts 8 of them in the hold-or-cut camp
On a six-six tie, a proposal to change rates fails and nothing happens
Forward silence is what trapped the Fed, not forward guidance
With no steer, market groupthink settled on a hike and left the committee no costless way to skip it
A hike this week may end up looking unanimous, and Kelly still expects at most one more this year
1. Tevye and the Fed
Kelly opens on Fiddler on the Roof. Tevye, he writes, is "the well-meaning patriarch of a poor family" who has trouble deciding, and three times in the play the music stops while he works through a soliloquy of "on the other hand's". The note is then built in exactly that shape, with the phrase marking every turn.
"The Federal Reserve also has a tough choice to make in a complicated time," he wrote
The call comes in the second paragraph: "We now believe that they will raise rates this week."
His reason for showing the working rather than just the conclusion is forward-looking: "However, it is important to understand the logical twists and turns needed to reach that conclusion in order to trace out a potential path forward for the economy, interest rates and asset class returns."
He splits the argument into three: the economy, the FOMC itself, and the importance of Fed credibility
The Tevye comparison is personal as well as structural — Kelly notes in an aside that the character always reminded him of his father-in-law, Bill
2. Oil at $104 vs $84
The first case for a hike is energy, and Kelly lays out the supply picture before disputing what it means.
"One reason for rising expectations of a Fed rate hike has been a renewed surge in oil prices," he wrote
On the war: "The war with Iran continues, with conflicting reports about how much oil is slipping through the Strait of Hormuz each day." What is not in dispute is the volume — "However, there is no dispute that traffic is down very significantly from pre-war levels."
Two other chokepoints compound it: Houthi rebels control the Bab-al-Mandab waterway at the entrance to the Red Sea, and Saudi Arabia has shut a key east-west pipeline in response to attacks
The price move is the fact the hawks are working from: "Consequently, as this is being written, WTI crude oil is selling at $104 per barrel compared to $84 on July 29th, when the FOMC last met."
Kelly does not expect relief before the election — Iran has little incentive to negotiate ahead of the US mid-terms — and carries that into the forecast: "We now expect headline PCE inflation to still be as high as 3.5% year-over-year in December"
3. The Other Hand on Oil
Then the music stops. Kelly's counter-case is that an oil shock is the kind of inflation a central bank is supposed to look through, and that the bond market agrees.
An oil price surge, he wrote, is a classic temporary supply shock, and he expects it to unwind: "It is a reasonable bet that a deal will be struck after the midterms to allow both Iranian oil and oil from the other Gulf states to flow through the Strait."
The second-round effect runs the other way: "In the meantime, higher oil prices will further depress other areas of consumer spending exerting downward pressure on core inflation."
The evidence he leans on hardest is expectations: "Equally importantly, there is no evidence that energy-induced inflation has changed long-term inflation expectations in a meaningful way."
The number behind it: "The expected CPI inflation rate over the next 10 years, implied by the yield difference between nominal Treasuries and TIPs, is 2.36%, up just 0.11% since the start of the year."
And what that implies about the Fed's target: "Since CPI inflation has run an average of 0.32% above PCE inflation over the past 20 years, this suggests the Treasury market still expects the Fed to, on average, hit its 2.0% PCE target over the next decade."
In a sidebar he heads off a statistical objection: core PCE inflation in July ran 0.9% above core CPI year-over-year, which he attributes to temporary methodology differences in health care, housing, insurance and financial services that should resolve fairly quickly and be partly addressed in the annual revision to the GDP accounts at the end of the month
4. A Hot Labor Market?
The second case for a hike is the jobs data, and Kelly states it at full strength before taking it apart.
The hawkish version: "The economy added a solid 162,000 payroll jobs in August and the unemployment rate remained unchanged at 4.1%, tying July for the lowest reading seen since January 2025."
Growth looks strong too: "In addition, the Atlanta Fed's GDPNow model is forecasting a booming 4.4% growth rate for the third quarter"
Kelly's counter is that "the payroll job jump came after two particularly weak months so the 3-month moving average gain is just 71,000."
The low unemployment rate is a supply story rather than a demand one: "The unemployment rate is low, but that is, to a large extent, because of immigration restrictions and the aging of the baby boom which has led to a 973,000 decline in the labor force over the past year – hardly a sign of a hot economy."
The measure he weights above all the others is pay: "Most importantly, year-over-year wage growth came in at just 3.1% for August – the weakest gain in any month since May 2021 and the fifth consecutive month in which real wages fell year over year."
"With a backdrop of solid productivity growth, there simply isn't any evidence that a tight labor market is translating into accelerating labor costs," he wrote
5. Q3 Is an Inventory Bounce
Kelly treats the third-quarter growth number as a composition problem rather than a strength signal.
"Finally, on economic growth, while we expect a bounce in third-quarter GDP growth, this is mostly due to an inventory swing following five consecutive quarters of falling stockpiles," he wrote
The forecast beyond it is slow, and he lists what is pulling it down: "With no further fiscal stimulus likely, with weak demographics hurting job growth, housing and consumer spending, and despite a continued AI capital spending boom, we expect real GDP growth to slow to a pace of just 1.5% to 2.0% from the fourth quarter of 2026 to the end of 2027."
The artificial intelligence spending boom appears in that sentence as an offset that is not enough, which is the only place it features in the note
6. Reading the Dots
The second strand of the hike argument is the June projections, and Kelly's treatment of it is the most arithmetical part of the piece.
The June dot plot leaned hawkish: "At that time, of the eighteen FOMC participants that submitted projections, eight wanted no change in rates by the end of the year and one wanted a 25-basis point cut."
On the other side: "However, in the raising rates camp, three wanted to see one rate hike, five wanted to see two rate hikes and one wanted to see three rate hikes."
"In other words, the hawks were more hawkish than the doves were dovish and the median dot was assessed to be in favor of one hike this year"
The objection is that the dot plot is not the electorate: "Only eleven of the eighteen members who submitted projections in June are actually entitled to vote at FOMC meetings this year."
Kelly's own count of those eleven: "When we analyze the various interviews and speeches of those eleven, we believe that eight of them may have been in the hold or cut camp."
What that requires: "If this is the case, then, assuming Kevin Warsh would now vote for a hike, three more would have to change their minds to provide the necessary majority to raise rates."
He adds the tie-break rule, which favors inaction: on a six-six vote on a proposal to change rates, the proposal fails and no change occurs
"This is a high bar given the conflicting evidence on the outlook for inflation, employment and economic growth noted earlier," he wrote
7. Politics Cut Both Ways
Kelly then works through the political pressure on the decision in both directions, and concludes the committee will try to ignore it.
The awkwardness of hiking: "It would also be awkward, to say the least, for the Fed Chairman to raise rates given the campaign the President waged against his predecessor because he wouldn't cut them."
Sharpened by the chairman's own record — "This is particularly the case because of the relatively dovish comments Kevin Warsh made about inflation before he was confirmed"
The other hand is a motive to hike rather than to hold. He notes that "if we were to go down a political path, some members of the committee might be tempted to raise rates just to retaliate against the administration for its attacks on Fed independence and individual Fed officials"
His expectation is that neither impulse governs: "However, on balance, we believe that the Fed will try to avoid thinking too hard about how the administration might view this week's decision" — and, in Jay Powell's words, carry out its duties without "political fear or favor"
The calendar argues for moving now rather than later: "In fact, the timing of the next FOMC meeting, less than one week before the mid-terms, would be a solid reason to make a first policy change this week rather than waiting for a time when their decision would be more likely to be judged through a more political lens."
8. Painted Into a Corner
The third strand is credibility, and it is the one that decides the call. Kelly's case is that the chairman's own stated approach removed his room to maneuver.
What Warsh has committed to: "Two months ago, in congressional testimony, Chairman Warsh asserted that the FOMC has no tolerance for persistently elevated inflation."
And how he has chosen to communicate: "He has also foresworn forward guidance and said that he wanted the Fed to observe market reaction to developments, direct and unfiltered."
The market took the invitation. "After a slightly higher-than-expected August core CPI reading was released on Friday, the Fed funds futures market has now priced in a 92% chance of a hike in September and fully priced in another rate hike by the end of this year and a third by March 2027," he wrote
The other price that moved: "In addition, in the six weeks since the last FOMC meeting, the 10-year Treasury yield has risen from 4.67% to 4.96%. The markets have clearly spoken."
"And this is where the Chairman has effectively painted himself into a corner," he wrote
He credits the formulation to a colleague: "To paraphrase my colleague, Jordan Jackson, there is clarity in forward guidance and awkwardness in forward silence."
Kelly spells out the guidance the Fed could have given if it wanted to keep its options open: that there is no wage inflation coming from the labor market, that long-term inflation expectations are steady and moderate, that both growth and inflation are likely to fall, that the mid-term result could move both, and that waiting until the end of the year would be wiser
The conclusion, and the one place the note's own device runs out: "However, in the absence of forward guidance, the market groupthink has coalesced around a rate hike this week and if the Fed doesn't deliver one, both Chairman Warsh and the FOMC will lose serious credibility." In Tevye's words, he writes, "there is no other hand" — "We consequently now expect the Fed to hike."
9. What Happens After
The last section is about the shape of the decision and what follows it, and it is where the note turns into portfolio advice.
Kelly expects the vote to look more decisive than the debate: "It should be noted that, if the Fed does indeed raise rates this week, it may not look, in retrospect, like a close call."
The mechanism is consolidation: "If a majority within the committee coalesces around a decision to hike, the other members may well join them to portray a more united front to the public and the President."
"If that is the case, the decision could be agreed to by a 10-2, 11-1 or even 12-0 vote."
He expects the market to over-extrapolate. "Finally, after a rate hike, it is common for markets to project more hawkishness going forward," he wrote — but his own forecast does not follow it: "However, notwithstanding this week's decision, we still expect both growth and inflation to cool entering 2027."
The rate path that follows from that is short: "If this is the case, the Fed could avoid a policy move in late October, and raise rates just once more or not at all in December."
The asset-allocation conclusion is the last line of the note: "This should limit any further increase in long-term yields and allow a resumption of a longer-term dollar decline, rewarding investors for continuing to invest in core fixed income for yield, international equities for total return, and alternatives for alpha, income and diversification."
Bonus Insights
The note changes a call without ever claiming the data changed. Every economic argument Kelly makes in it points away from a hike, and the hike is expected anyway
The Strait of Hormuz, the Bab-al-Mandab and a Saudi pipeline all appear in one paragraph, which is the closest the note comes to saying the energy constraint is structural rather than a single event
Kelly puts the tie-break rule in parentheses — a six-six split fails and rates do not move — which is the detail that makes his eight-of-eleven count matter rather than being a curiosity
The phrase he borrows from Jordan Jackson, on the awkwardness of forward silence, is the only line in the piece he does not claim as his own
Kelly's bottom line is that the economic case for raising rates this week is weak on wages, on the labor force and on inflation expectations, and that the Fed will raise them regardless because a chairman who abandoned forward guidance left the market to price a hike he can no longer decline without losing credibility.
Products, Companies & Tools Mentioned
GDPNow (The Atlanta Fed model Kelly cites as forecasting a booming 4.4% growth rate for the third quarter, a number he then argues is mostly an inventory swing)
J.P. Morgan Asset Management (Kelly's firm, whose house view this note carries, including the forecast of 1.5% to 2.0% real GDP growth from the fourth quarter of 2026 to the end of 2027)
The Federal Reserve (The subject throughout — Kelly reads the June dot plot against the eleven members actually entitled to vote this year and counts eight of them in the hold-or-cut camp)
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