Fed Credibility on the Line as Rate Hike Looms in September

The Federal Reserve may raise interest rates for the first time in three years at its upcoming September meeting, according to Stephanie Aliaga, Global Market Strategist at JPMorgan Asset Management. A rate hike would bolster the Fed's credibility on inflation, which has been above the 2% target for over five years.

The futures market is pricing in a 70% chance of a 25-basis-point increase, with the federal funds rate moving from 3.50%-3.75% to 3.75%-4.00%. This decision comes after three regional Fed presidents dissented in favor of a hike at the July FOMC meeting.

The dissenters pointed out that PCE inflation has been running above 3% year-over-year, and supply chain disruptions tied to the Iran conflict have added upward pressure on prices. JPMorgan Wealth Management analysts have shifted their forecasts to align with the September hike expectation, citing persistent inflation data and supply-chain disruptions as key drivers.

A rate hike would ripple across multiple markets, with fixed-income investors already repositioning in anticipation of tightening. The two-year yield has been drifting upward in recent weeks, reflecting the higher probability of a rate increase.