[New York = E-Daily Correspondent Seong Joowon ] A September interest rate hike by the U.S. Federal Reserve (Fed) is becoming a foregone conclusion. Major Wall Street institutions, which just a week ago were leaning toward a rate freeze, have now shifted one after another toward expecting a 25-basis-point (bp; 1 bp = 0.01 percentage point) hike. This shift comes as inflation remains stubborn and international oil prices have surpassed $100 per barrel. Market attention is now shifting from “Will they raise rates this week?” to “How many more times will they raise rates?”

According to the Chicago Mercantile Exchange (CME) FedWatch on the 14th (local time), the interest rate futures market is pricing in a roughly 92% probability that the Fed will raise the benchmark interest rate by 25 basis points from the current 3.50–3.75% to 3.75–4.00% at the Federal Open Market Committee (FOMC) meeting on the 16th.
Economists’ forecasts have also shifted dramatically. In a Reuters survey conducted on the 11th following the release of inflation data, 86 out of 101 economists (85%) anticipated a 25-basis-point hike at this meeting. In a survey conducted just one week earlier, more than two-thirds had predicted that rates would remain unchanged. In effect, the consensus has been virtually reversed in the span of a week.
Major investment banks, including Goldman Sachs, JPMorgan, HSBC, and Deutsche Bank, have also recently revised their September rate forecasts toward a hike. Bank of America (BofA) predicted three rate hikes this year early on, while Barclays is forecasting two. The debate on Wall Street is now focused less on whether there will be a hike in September and more on the magnitude and pace of further tightening thereafter.

Inflation, Oil Prices, and 5% Treasury Yields… Options for a “Hold” Are Narrowing

The decisive factor that caused

Wall Street

to change course was inflation. The August core Consumer Price Index (CPI) rose 0.3% from the previous month. Since the producer price sub-components reflected in the Personal Consumption Expenditures (PCE) Price Index—the Fed’s preferred inflation gauge—also showed strength, there is speculation that the upward trend in the core PCE for August may have also intensified.
This was compounded by the oil price shock stemming from the Middle East. International oil prices exceeded $100 per barrel, and U.S. diesel prices soared to record highs. Reuters reported that expected inflation is also rising amid the sharp spike in oil prices.
The benchmark set by Federal Reserve Chair Kevin Warsh himself last month at Jackson Hole also poses a challenge. At the time, he emphasized the need to confirm that core inflation is moving toward the Fed’s 2% target “clearly and at sufficient speed.” However, recent price and oil price trends are moving in the opposite direction.
Michael Feroli, an economist at JPMorgan, pointed out, “Given that the chairman has repeatedly issued stern warnings that he will not tolerate inflation, the Fed’s institutional credibility could be at risk if there is no action to back up those statements.” While he expects a 25-basis-point hike this week, he assessed that it would be “a much tougher decision—a closer call—than the roughly 90% probability currently priced into the market suggests.”
Another factor putting pressure on the Fed is the bond market. The yield on the 10-year U.S. Treasury note surpassed 5% during trading today. Bank of America summarized the Fed’s choice as “hike or risk a large bond spike.” Scott Anderson, chief U.S. economist at BMO Capital Markets, also warned that “the Fed’s credibility in responding to inflation is at stake,” adding that the Treasury yield curve could steepen significantly if the Fed fails to act.

A Rate Hike Would Clash with Trump… and the Next Message Is Also a Challenge

Even if rates are raised, Wash’s dilemmas won’t end. President Donald Trump nominated Wash to be Fed Chair amid expectations that interest rates would be cut. However, if Wash—who took office last May—raises rates this week, his first rate change since taking office will be a hike rather than a cut. Ahead of the midterm elections this November, there is also significant political pressure, as this could increase the burden on voters who are sensitive to borrowing costs, such as mortgage and auto loan rates.
Jonathan Miller, chief U.S. economist at Barclays, predicted, “Eventually, Trump will start directing his anger toward Wash.” He anticipates two interest rate hikes this year.
The trickier issue is “what comes next.” Since taking office, Wash has avoided providing forward guidance on the future path of interest rates as much as possible. However, if he raises rates this time, it will be difficult for him to avoid questions about further hikes during the press conference on the 16th.
Oscar Muñoz, an economist at TD Securities, said, “If Wash continues to refuse to provide forward guidance, he’ll have to walk a fine line in his remarks,” adding, “If he tightens policy in September, it seems quite clear that further tightening will follow.”
In fact, in a Reuters survey, 37 out of 70 respondents (53%) expected at least one additional rate hike by the end of March next year. This contrasts with a survey conducted a week earlier, in which 56% of respondents had forecast that rates would remain unchanged over the same period. Furthermore, the number of forecasters expecting rate cuts in 2027 is no longer in the majority. The interest rate futures market has gone a step further, pricing in approximately four rate hikes by the end of July next year.
Diane Swonk, chief economist at KPMG, said, “A 25-basis-point hike may not be the end, but the beginning,” adding, “The only way to sustainably lower borrowing costs is to curb inflation.”
The balance of power within the Fed has also shifted more toward rate hikes. At the July meeting, Beth Hamack, President of the Cleveland Fed; Lori Logan, President of the Dallas Fed; and Neel Kashkari, President of the Minneapolis Fed, opposed the decision to hold rates steady and argued for a rate hike. Federal Reserve Governor Christopher Waller and New York Fed President John Williams—who until recently had taken the stance of waiting to see how inflation trends develop—may also change their views now that they have seen inflation come in stronger than expected.
Ultimately, the key focus of the FOMC meeting on the 16th lies not in the 25-basis-point hike itself, but in what comes after. Whether Wash describes this hike as a one-time measure to prevent inflation from rising again or leaves the door open for further hikes is expected to be a major factor influencing U.S. Treasury yields and stock markets going forward.