September Rate Hike Seen as Near Certainty, But Rapid Hikes May Bring Greater Turmoil

The U.S. Federal Reserve is likely to raise interest rates in September, but if it delays and then makes rapid back-to-back hikes, markets could face even greater turmoil.

Markets now treat a September rate increase as nearly certain, with the CME FedWatch tool showing a probability of over 90% for a hike this month. However, economists are shifting their views, with 85% of those surveyed by Reuters expecting the Federal Open Market Committee to raise the benchmark rate by 25 basis points at its September meeting.

Some argue that any signal from Fed Chair Kevin Warsh of a pause could cause even greater market disruption. If the Fed fails to act despite high inflation, confidence in its resolve to curb price gains could be shaken. The 10-year Treasury yield has already climbed to its highest level since July 2007, at 5.039%, and long-term yields may climb further if the Fed holds rates steady.

Others say the fallout from a rate increase is unavoidable. Higher borrowing costs could curb corporate investment and household spending, weighing on the real economy. Rising rates also reduce the present value of companies' future cash flows, pressuring share prices.