Fed Set to Raise Rates for First Time in Three Years Amid Strong Labor Market

The Federal Reserve is set to announce its September interest rate decision on Wednesday, with a 25-basis-point hike widely expected. According to Reuters, about 85% of economists polled expect the Fed to raise rates by 0.25%, lifting the target range for the federal funds rate from 3.50%-3.75% to 3.75%-4.00%. Interest rate futures reflect an approximately 90% probability of a 25-basis-point hike.

The primary driver behind the rapidly heating rate-hike expectations is that recent U.S. employment and inflation data have failed to show clear support for easing. In August, U.S. nonfarm payrolls increased by 162,000, significantly higher than the market consensus expectation of 56,000, while the unemployment rate held steady at 4.1%. Year-over-year wage growth slowed from 3.2% to 3.1%, but the overall labor market continues to show strong resilience.

The August CPI rose 0.4% month-over-month and 3.4% year-over-year, while core CPI increased 0.3% month-over-month and 2.4% year-over-year. Meanwhile, August PPI rose 0.4% month-over-month, with its year-over-year growth rate further accelerating from 4.8% in July to 5.4%. The resurgence in energy prices has heightened market concerns about inflation heating up again over the coming months.

Market volatility could arise not just from a 25-basis-point hike, but also from the dot plot and Warsh's statements regarding future policy. If rates are raised by 0.25% in September, the midpoint of the target range will rise to 3.875%, effectively close to or slightly above the June dot plot's projection for the end of 2026.