The Two Weeks That Will Be (6th September 2026)

1. The Fed
Expectations for a hike from the Fed at their next meeting on Wednesday 16th September have whipped around as the market adjusts to a new Fed Chair attempting to introduce a new paradigm. The key message from Jackson Hole was not whether Warsh was dovish or hawkish but his clear exhortation that “We should not indulge a regime in which market participants are looking primarily to the Fed for their next trade.” Instead they “should be tracking real information across the economy. They should draw their own conclusion”.  

With jobs data rebounding, the bellwether ISM Manufacturing hovering at a four-year high and inflation above target for the last five years, the US economy looks like it needs higher interest rates. The Atlanta Fed GDPNow real GDP estimate is running at a scorching 4.7%, making the nominal Q3 GDP rate close to 7%: 

Warsh noted the underlying strength in his J-Hole speech, highlighting “business capital expenditures – the seed corn of future economic growth – are rising rapidly” and “the labour markets are consistent with full employment.” On the thorny issue of AI, whether it’s inflationary short term due to demand exceeding capacity constraints and/or deflationary long term due to productivity benefits, Warsh drew the sanguine conclusion that “the potential for substantially higher growth is on the rise“.

Whether markets agree, we should find out in the reaction to the US inflation print Friday (and to the China version on Wednesday). But even if a rate hike becomes fully priced in, the market still can’t quite believe that anyone appointed by President Trump would be anything other than dovish. This is where we run into what Ben Bernanke described in April 2004 as a “hall-of-mirrors problem”. The market watches the Fed while the Fed watch the markets, reducing the information value from both to almost nothing. 

And the Fed Funds rate is not the only game in town. Longer dated yields have risen lately, incurring the usual exclamatory headlines of doom. In August, the US auctioned 30-year bonds at the highest yield since 2001. But given the global economy is in a far different place than it was twenty-five years ago, with the highest inflation in four decades, wars in the Middle East and Europe redrawing supply chains and a technological revolution requiring urgent hardware to meet the software demands, we should be exclaiming that those yields aren’t even higher.

This is even more the case if we look at the amount of bond supply accelerating out of the hyperscalers, as this chart from Michael Cembalest of JPMAM demonstrates:

Huge investment by leading technology companies? An economy at full employment? Above target but not rampant inflation? A stock market with a Sharpe Ratio above 1 for all but one of the last six years? Scott Bessent and Kevin Warsh must be wondering how to deal with the hospital pass the media screams they have been given by the incumbent of the White House. Or perhaps they see an opportunity to steward financial markets from the pavlovian response engendered by the deflationary post-financial crisis doom years where only ever-lower interest rates could save us all.  

The Fed will deliver a hawkish unchanged verdict as Warsh walks the tightrope of delivering a monetary policy revolution without financial market dislocation. 

2. The BOJ
With Scott Bessent calling the shots in Japan’s monetary stance, currency, and, if he had his way, fiscal policy, the Bank of Japan will finally regain the initiative and try to get ahead of the curve with a 50bp hike on Friday 18th September. Ueda can see how the Abenomics 2.0 wind is blowing. Takaichi will err towards looser fiscal policy and the BOJ must respond with tighter monetary conditions. Whilst Ueda would usually like to avoid volatility and not surprise the markets, this is a good moment to do so for a short-term shock to reset expectations. He can then proceed with one hike every quarter and let market pricing of increased tightening do the inter-meeting work. This should also boost the currency more than patient hikes ever could. And if it doesn’t, Bessent can just write another post-it note.

3. ECB
The ECB might not be too pleased if (when) it is once again Euros that the US sells to buy Japanese Yen. A weaker currency might complicate their plans given they’ve been preoccupied by risks of inflation ever since the Ayatollah was assassinated. Despite their fears, second round price pressures have yet to materialise – something Joachim Nagel, President of the Bundesbank, pointed out at the G20 meeting. 

He also effectively confirmed that they will hike 25bp on Thursday but “Beyond this September meeting, however, I am cautious about giving any indication of what comes next“. Given we will get an update of staff forecasts, this is an opportunity for the ECB to ease back their hawkishness.  

4. BOE
The Bank of England would really rather not have to do much until the Budget is out of the way, meaning they will deliver an unchanged verdict on Thursday 17th September. They will prefer fiscal tightening to do some work for them in reining in inflation; we will get the latest inflation print on Wednesday 16th September. 

5. The UK
Step forward Chancellor John Healey with a speech on Monday. He will attempt to get ahead of Budget speculation without actually creating Budget speculation. It’s a tricky task which means the focus will be on the long term vision, something PM Burnham wants to deliver in more detail himself with a set piece “10 Year plan” scheduled for the month after the Budget. This all smacks of an administration that would really quite like to get itself a new mandate under the Manchesterism banner sooner rather than later. Burnham’s advisers might fancy their chances with the electorate now that Reform are under pressure, the Greens have fallen back and the Conservatives remain stuck in the polls despite the growing confidence in their leader. Throw in a likely by-election victory at Starmer’s vacated Holborn & St Pancras seat and it will look tempting for some Labour strategists.

But a prime minister, and one who has tried three times to lead his party, would not throw away a landslide haul of MPs without extreme confidence. And as much as Andy Burnham isn’t short of self-belief he has also been in politics long enough to be long of caution. 

The cautious approach is evident in the approach to the Budget. Far from being a moment of political opportunity it is being treated as a hurdle to clear. Where Reeves went big but small, borrowing and spending more through small changes, Healey simply wants to go home. In an FT interview he referred to an upcoming change to the discount rate which should enable investments to be worth more in the near term, ensuring that regional projects get what he describes as a “fair hearing“. The Green Book Discount Rate Review reported on 30th June 2026 that it should be 0.5pct pts lower, the result of a Green Book Review instigated by the new Labour administration. With the discount rate having been unchanged since the previous Labour government lowered it using the “Social Time Preference” method in 2003, it’s a timely move that Healey can thank Reeves for.  

But it is not a silver bullet. It’s barely a bronze pea shooter. In a world of high debt, high inflation and not enough high growth, the UK will remain one of the countries most vulnerable to external (and internal) events, no matter the vibes emanating from the Northern Lads of Downing Street. And particularly in an administration that has never shown an ability to get its party to vote on spending restraint to ease the burden. Kicking the can down the road for arguments over the spending review might provide political breathing space but the fiscal room is narrowing by the minute. Burnham’s responses in his first Prime Minister’s Questions do not instil confidence that he has the ability to deal with any questions from the market:

• Kemi Badenoch asked “How does the Prime Minister plan to tackle the Government’s rising debt costs?“
• Burnham replied “I say to the right hon. Lady that the turbulence on global markets is because of that exposure that they left behind. We are turning the corner. In the first half of this year, we have had the fastest growth in the G7. Borrowing fell to its lowest level in six years. We are cutting the deficit faster than any other G7 country“.

But the market doesn’t yet know if the new administration will continue with the policies of the past – nor how Burnham will respond if (when) borrowing costs make the fiscal arithmetic impossible to address without spending cuts. Burnham reiterating information that the market already has doesn’t bode well for understanding that he now occupies the position of making decisions that will affect market prices. He went on to blame Liz Truss, a politically expedient rallying call, but not much use to markets who are now four years and three Chancellors further on.  

If you would like to give the latest Chancellor your ideas, then you still have time. The consultation period for the Budget doesn’t end until 11:59pm on 9th September. Click here to give him your thoughts. 

6. Sweden and Germany elections
With the AfD poised to emerge victorious in the Saxony-Anhalt regional election on Sunday, Sweden offers a case study for how the rise of right-wing parties ultimately manifests. There will be a general election on Sunday 13th September and it is a close race between the left and right blocs on current opinion polls. The governing right-wing bloc had been expected to lose with the smaller Liberal party facing ejection from parliament through failing to reach the threshold for representation. The party has suffered from accommodating the right-wing eurosceptic and anti-immigration Sweden Democrats. But there is now a similar fear coursing through the left wing bloc, with the Centre Party and Left Party ruling out working with one another.

Voters have turned away from such fractious intra-bloc tensions and the parties of the left and centre-left have lost their commanding lead in the polls. The right-wing bloc has at least found a way to work with one another. This is a far cry from the years of the established parties enforcing a cordon sanitaire against the Sweden Democrats. With the SD adding seats at every election since they first gained representation in 2010, it eventually became impossible to form a government without them. In 2022, the SD took 20.5% of the vote with the other three parties of the right only taking 29% between them. This led to the Tidö agreement which brought the SD into government for the first time, albeit on a confidence-and-supply arrangement.

With voter fragmentation persisting and thresholds in proportional representation complicating coalition building, the parties of extreme left and right can no longer be considered a fringe concern. Indeed, the more that authorities seek to undermine or ignore them, the greater their support. Marine Le Pen now wins against all second round challengers in the latest Elabe poll, despite her conviction for embezzlement of European Parliament funds. Jordan Bardella was greeted as a hero at the Reform UK party conference as he signed a commitment on stage with Nigel Farage to “stop the boats”. 

In our 2025 Year Ahead we warned that the German federal coalition would ultimately fail and have to find some accommodation with the AfD. A regional victory could give them their first position of power. Even if the other parties unite to prevent this outcome by a matter of a few seats, AfD voters will once again feel aggrieved. And if they cannot gain representation at the ballot box, they may ultimately choose other methods in order to be heard.