Fed Expected to Hike Rates as Inflation Fears Grow

The Federal Reserve is expected to raise interest rates for the first time in over three years at its upcoming meeting, according to a Reuters survey of 101 economists. The survey found that 86 respondents, or 85%, expect the Fed to increase its benchmark rate by 0.25 percentage point.

This would be the Fed's first rate hike since July 2023 and would bring the target range to 3.75%-4.00% from 3.50%-3.75%. Market expectations have shifted sharply in recent days, with more than two-thirds of respondents expecting rates to remain unchanged just last week.

The decisive trigger behind the shift in expectations is inflation, which has been fueled by higher oil prices tied to the war in the Middle East and rising consumer prices. Many economists believe that August core PCE inflation rose again, further pressuring the Fed to take action.

Interest-rate futures are pricing in a 90% chance of a rate increase this week, with some forecasting four hikes by the end of July next year. Scott Anderson, chief U.S. economist at BMO Capital Markets, said that the Fed's inflation-fighting credibility is on the line and that failing to back up hawkish rhetoric with action could leave the U.S. Treasury yield curve at risk of becoming much steeper.