Fed Pause Could Shock Markets More Than Rate Hike

The Federal Reserve is set to make its interest-rate decision this week, and markets are bracing for a potential hike. But some analysts say that if the Fed does nothing, it could have a more significant impact on financial markets than a rate increase would.

Traders are pricing an 87% chance of a 25-basis-point rate hike on Wednesday, following hotter August inflation and higher oil prices. Goldman Sachs and JPMorgan have both moved into the hike camp, with Goldman abandoning its previous hold call and now expecting a quarter-point increase.

August headline CPI rose 0.4% from July and 3.4% from a year earlier, while core CPI increased 0.3% on the month and annual core inflation stood at 2.4%. Goldman economist David Mericle told the Financial Times that policymakers would 'worry about the potential market reaction to not delivering a hike that recent Fed communication has guided the market to now almost fully price.'

Investors have adjusted to higher short-term rates, but a pause could still pressure rate-sensitive assets. A well-communicated pause could still work if the Fed signals that future tightening remains available, but hesitation without a clear explanation could raise doubts about whether policymakers are prepared to tolerate inflation above target.