Fed Rate Hike Expected to Bring Relief and Uncertainty

The Federal Reserve is widely expected to raise interest rates by 25 basis points on September 15-16, following hotter-than-expected inflation and higher energy prices. Major banks such as Goldman Sachs, J.P. Morgan, HSBC, and Deutsche Bank are forecasting a hike.

CME FedWatch puts the probability of a quarter-point hike at about 90%, leaving little suspense around the policy move itself. The bigger question for investors is what comes next.

Some market strategists argue that a well-telegraphed move could reduce uncertainty, stabilize bonds, and leave equities supported by strong corporate earnings and investment. Others warn that a hike accompanied by hawkish guidance could put upward pressure on Treasury yields and the dollar, weighing on rate-sensitive stocks.

The latest shift toward tighter policy follows stronger US consumer and producer inflation readings for August and a renewed increase in oil prices amid tensions in the Middle East. HSBC economist Ryan Wang said 'Lack of inflation progress has tipped the balance' in favor of a September rate hike.

J.P. Morgan economists led by Michael Feroli also turned more hawkish after the latest data, saying rising bond yields, higher energy prices, and firm inflation readings made a September hike 'more likely than not'. David Russell, Global Head of Market Strategy at TradeStation Group, expects Kevin Warsh to reinforce the hawkish message heading into the decision.