Fed's Rate Hike Decision Looms Amid Supply-Shock Inflation

The Federal Reserve is holding a two-day meeting to determine American borrowing costs. According to market prices, there's a 91% probability of a 25-basis-point rate increase. The move would push the federal funds target range to 3.75-4%, from the current 3.5-3.75%. Federal Reserve Chair Kevin Warsh has described this level as not 'broadly restrictive', implying that the Fed believes it needs to do more.

The inflation driving this decision is largely a supply shock, caused by energy price increases due to the ongoing Iran conflict and disruptions in crude shipments. Rate increases don't reduce oil prices; instead, they slow hiring, cool demand, and raise capital costs. This creates a bind for Warsh, as some members of the Federal Open Market Committee voted to raise rates at the last meeting when he chose to hold.

The Fed's Summary of Economic Projections will offer the first public view of where FOMC members see rates at year's end. A median dot above 4% signals a follow-on hike is in play; a median at exactly 4% implies a pause. Some economists argue that hiking into a supply-side shock is self-defeating, as it doesn't reduce the conflict driving energy costs.