Federal Reserve Expected to Hike Rates Amid Persistent Inflation

The Federal Reserve is widely expected to raise its benchmark interest rate on Wednesday, September 16, marking the first hike in over three years.

Economists predict a 0.25 percentage point increase in the federal funds rate, setting the target range at 3.75%-4%. Traders have assigned a greater than 90% probability to this quarter-percentage-point hike, an increase from 36% a month ago. This anticipated move comes as inflation remains above the central bank's 2% annual target, with the Consumer Price Index rising 3.4% in August and the personal consumption expenditures index up 3.7% in July.

The expected rate hike occurs despite President Trump's repeated calls for lower interest rates. Fed Chair Kevin Warsh's recent remarks at the Jackson Hole symposium, where he argued the Fed had not yet achieved its inflation target, contributed to the shift in market expectations. Morgan Stanley economists have revised their forecast from no hikes this year to two, anticipating one this week and another in December.

Brandon Zureick, chief economist at Johnson Investment Counsel, also foresees another hike or two beyond this week if energy prices stay high and the economy remains strong. The last Fed rate increase was in July 2023, which brought the benchmark rate to a range of 5.25% to 5.5%. Since then, the Federal Open Market Committee has lowered rates six times, totaling 175 basis points.

A resurgence in crude oil prices above $100 a barrel, linked to the Iran conflict, further pressures the central bank to act. Kristin Forbes, an economist at MIT's Sloan School, noted increased consumer and company sensitivity to high inflation, leading to faster price increases. The FOMC will also release its updated Summary of Economic Projections, including outlooks for unemployment, inflation, and gross domestic product. Yields on US Treasurys are rising, with the benchmark 10-year Treasury note around 5%, its highest since 2007.