Fed Expected to Raise Rates for First Time in Three Years as Stubborn Inflation Pressures Mount

The Federal Reserve is widely expected to raise its benchmark interest rate by a quarter of a percentage point on Wednesday, a move that would mark its first rate increase in more than three years and underscore Chairman Kevin Warsh’s commitment to taming persistent inflation.

Futures traders on Monday were pricing in a better than 92% probability of a rate increase this week, according to the CME Group’s FedWatch gauge, with a more than 75% chance that the Federal Open Market Committee would follow up in December with another move, CNBC reported. The fed funds rate currently stands at 3.50% to 3.75%, and an increase would lift the target range to 3.75% to 4.00%.

The strong market expectations follow another run-up in fuel prices and inflation data last week that showed prices continued to climb in August. The consumer price index rose at an annual rate of 3.4%, a broad measure that was lifted significantly by higher oil and gas prices. Core inflation, which excludes energy and food, ran at a 2.4% rate, down 0.1 percentage point from July, according to CNBC.

Oil prices have surged above $100 a barrel amid renewed hostilities in West Asia, adding to the upward pressure on prices. The developments come after Warsh told global central bankers in Jackson Hole, Wyoming, last month that he wanted to see inflation moving toward the Fed’s 2% target “clearly and at sufficient speed,” as reported by Business Standard.

The decision is far from unanimous. At the July meeting, the FOMC voted 9-3 to hold rates steady. The three dissenters — Dallas Fed President Lorie Logan, Cleveland Fed President Beth Hammack and Minneapolis Fed President Neel Kashkari — all supported a quarter-point hike. Assuming their positions haven’t changed, four other members would have to switch their votes to secure a majority.

Among the most-watched voters, Governor Christopher Waller voiced support for another hold at the September meeting in public remarks on Sept. 3. “What’s the cost of waiting one meeting? Hiking 25 basis points, one meeting right now, is not going to bring the [consumer price index] down to 2%,” he said, according to CNBC. New York Fed President John Williams also advocated a “wait-and-see” approach earlier this month.

Nevertheless, the mounting pressure from market pricing and Warsh’s own emphasis on inflation have shifted the calculus. Goldman Sachs economist David Mericle said in a client note that the firm changed its call from no change to a hike primarily because market expectations would force the Fed to move, CNBC reported. “We do not see a strong economic case for raising the funds rate,” Mericle wrote, attributing the overshoot to “one-time factors whose impact is likely to fade.”

The vote margin will reveal the extent of the intellectual divide on the committee, CNBC noted, and also provide important signals about how effectively Warsh’s leadership is reverberating inside the Fed. JPMorgan Asset Management chief global strategist David Kelly said in a market note that “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.”

A rate hike would also set up a potential conflict with President Donald Trump, who picked Warsh with the explicit expectation that he would cut interest rates. Trump has so far not blamed Warsh for failing to deliver, saying it is the fault of his “political” fellow central bankers, Business Standard reported. A decision to raise rates so close to the November elections could force Warsh into delivering at least some guidance on the rate path, a balancing act that economists have flagged.

**Market reaction and consumer impact**

Historically, the start of a new hiking cycle has been a drag on equities. A look at the S&P 500 following the initial rate hikes of six tightening cycles over the last 30-plus years showed that the broader index drops an average of 3.4% in the month afterward, according to Canaccord Genuity analyst Michael Graham, as reported by CNBC.

Yet this week could be different. With the market pricing in a 90% likelihood of a hike, some analysts see the possibility that stocks could actually rally if the move restores the Fed’s credibility and helps anchor long-term bond yields. “It’s the signaling impact and the net impact on the long end of the curve that would end up being the positive thing for equity markets,” Scott Ladner, chief investment officer at Horizon, told CNBC.

Bank of America Securities rates strategist Mark Cabana said that if Warsh sounds tough on inflation, two-year Treasury yields would likely rise 5 to 10 basis points while 30-year rates fall. A dovish press conference implying the hike was unpopular could send longer-dated yields higher. “Fed faces simple choice at Sept FOMC: hike or risk large bond spike,” Cabana wrote.

For consumers, a rate hike would raise borrowing costs at a time when households are already under financial strain. Credit card rates, already above 20%, will rise following the move, likely to record highs, Moody’s chief economist Mark Zandi told CNBC. Auto loan rates on new loans are expected to rise by around 12 basis points in the months following a 25-basis-point hike, according to a WalletHub analysis cited by CNBC.

The impact on mortgages is less direct. The average rate on the 30-year fixed mortgage surpassed 7% last week as the 10-year Treasury yield topped 4.95%. LoanDepot chief investment officer Jeff DerGurahian said that if the Fed presents the hike as a measured step, “longer-term Treasury yields could hold steady or move lower, allowing 30-year mortgage rates to do the same.”

Savers stand to benefit, as deposit rates tend to correlate with changes in the fed funds rate. “A potentially overlooked upside to elevated rates is the opportunity to capture higher yields for savings,” Mark Hamrick, an economic analyst, told CNBC.

The Fed will also release its quarterly “dot plot” of rate projections on Wednesday. Warsh withheld his dot in July, and the updated grid will offer fresh insight into the committee’s outlook. Douglas Holtz-Eakin, president of the American Action Forum, said in a Bloomberg interview that failing to raise rates this week would undercut the Fed’s credibility as inflation remains its central challenge.