Fed expected to raise rates for first time since 2023

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Fed expected to raise rates

Highlights

Markets see a greater than 90% chance of a Fed hike.
A quarter-point move would put rates at 3.75%-4%.
It would be the first increase since July 2023.
Inflation and higher oil prices are driving tightening expectations.

Traders assign a probability above 90% to a quarter-percentage-point increase that would lift the federal funds target range to 3.75%-4%, CNBC reported. That marks a sharp shift from a month ago, when the probability stood at just 36%. The Fed entered this meeting with its target range at 3.50%-3.75%.

Inflation and oil change the calculation

The case for tighter policy has strengthened as inflation has failed to return convincingly toward the Fed’s 2% goal. The consumer price index (CPI) rose at a 3.4% annual rate in August, while a firm labor market has reduced the immediate cost of tightening policy.

Oil has added another source of concern. Crude prices have moved back above $100 a barrel amid the conflict involving Iran, raising the possibility of renewed pressure on transportation and consumer prices. New U.S. tariffs and continued investment tied to the artificial-intelligence boom have also complicated the inflation outlook.

Morgan Stanley recently shifted from expecting no rate increases this year to forecasting two, including one in September and another in December.

Bond markets add pressure

The global rise in borrowing costs has made Wednesday’s decision more consequential. The U.S. 10-year Treasury yield moved above 5% Tuesday, reaching levels not seen in roughly 19 years. Official Fed data showed the 10-year constant-maturity yield at 4.97% on Sept. 14, up from 4.80% on Sept. 8, illustrating the rapid increase preceding the latest move.

Since the Fed’s last increase in July 2023, policymakers have cut rates six times by a combined 175 basis points. A new hike would therefore mark a significant change in direction.

Markets turn to the path beyond September

The decision itself may be only part of the market impact. Investors will examine the Fed’s updated economic projections for inflation, unemployment, and growth, along with policymakers’ interest-rate expectations, which will extend through 2029 for the first time.

Chair Kevin Warsh’s press conference will also be closely watched for indications about subsequent meetings. Investors have already moved well beyond debating whether rates can rise and are increasingly focused on how long tighter policy could last.

That distinction matters for bonds, equities, and household borrowing costs. Mortgage rates remain elevated, with the average 30-year fixed rate above 6.7% ahead of the meeting. A signal that further increases remain possible could keep pressure on long-term yields even after Wednesday’s expected move.

We also reported Goldman Sachs and JPMorgan strengthen September Fed hike call.

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