Fed Hike Looms: Markets Priced for 25-Point Rate Increase

The Federal Reserve is expected to raise interest rates for the first time since July 2023, with markets assigning a 90-94% probability to a 25-basis-point hike at today's FOMC meeting.

This would mark a sharp reversal from the central bank's easing cycle over the past several years, which saw six reductions totaling 175 basis points. The federal funds target range would climb to 3.75%-4.00% if the Fed follows through.

The shift in expectations is driven by stubbornly high inflation above the Fed's 2% target and surging oil prices over $100 per barrel, fueled by US-Iran geopolitical tensions. Chair Kevin Warsh's hawkish tone at the Jackson Hole symposium also signaled that the central bank was prepared to act if inflation refused to cooperate.

Resilient employment data has further undercut any argument that the economy needs continued monetary support. Bond markets are already feeling the impact, with the 10-year Treasury yield breaching 5% for the first time since 2007 and the dollar strengthening against major currencies.