Pause, Not Hike, Could Shock Markets More Than Expected Rate Increase

The Federal Reserve's decision to raise interest rates this week could have an unexpected outcome - it may not be the hike that shocks markets, but rather a pause.

According to traders, there is an 87% chance that policymakers will increase rates by 25 basis points on Wednesday after hotter August inflation and higher oil prices.

Goldman Sachs and JPMorgan have both moved into the hike camp, leaving investors facing an unusual asymmetry as a hike is largely priced in, while a pause could revive doubts about the Fed's inflation credibility and push long-term Treasury yields higher.

As recently as before last week's inflation data, markets were less convinced of a September hike, with the probability around 70%, but it has since climbed to 87% after stronger CPI and PPI readings.