An overwhelming majority of economists surveyed by Reuters now expect the Federal Reserve to raise its benchmark rate by 25 basis points at its September 15-16 meeting. The move would take the policy range to 3.75%-4.00% and represent the first increase since July 2023.
The shift represents a significant change from expectations only a week earlier, when more than two-thirds of economists anticipated the Fed would leave rates unchanged.
Financial markets have moved in the same direction. Interest-rate futures are pricing in close to a 90% probability of a hike this week, while investors are increasingly considering the possibility of additional increases through 2027.
The change follows stronger-than-expected inflation data and other economic indicators that have weakened confidence in the previous disinflation trend. Economists also expect core inflation measures to have accelerated in August.
Oil prices have added another layer of concern. Crude futures remain above $100 a barrel as conflict in the Middle East disrupts energy flows, while diesel prices have reached record levels. Higher energy costs threaten to feed directly into consumer inflation and inflation expectations.
The pressure is already visible in government bond markets. The benchmark 10-year US Treasury yield is hovering close to 5%, a level that has become increasingly important for investors and policymakers.
A further increase in yields could raise borrowing costs for households, companies and governments, potentially slowing economic activity. Yet investors are also concerned that failing to raise rates could undermine the Federal Reserve's credibility in its fight against inflation and trigger an even sharper sell-off in longer-dated Treasuries.
The policy decision is therefore becoming a test of the Fed's inflation-fighting credentials under Chair Kevin Warsh, who has avoided providing explicit forward guidance on future interest-rate moves.
The political consequences are also significant. Higher borrowing costs could intensify pressure on households already facing elevated living costs and potentially complicate President Donald Trump's economic agenda ahead of the November midterm elections.
For financial markets, the immediate question is no longer simply whether the Fed will hike. Investors are increasingly focused on whether Wednesday's expected move will be the beginning of a renewed tightening cycle or a limited response to a temporary inflation shock.
