Fed Set to Hike Rates, First Since 2023
Fed Set to Hike Rates, First Since 2023
The News
The Federal Reserve is expected to raise interest rates on Wednesday — its first hike since 2023 — because inflation has firmed up and oil has pushed above $100 a barrel.
Markets put the odds of a quarter-point increase at roughly 85%, according to The Center Square.
It would be the first rate increase under Chairman Kevin Warsh, who Reuters notes dislikes giving any guidance about the likely path of rates but has emphasized price stability and signals from financial market pricing.
A majority of economists polled by Reuters now expect the hike Wednesday and at least one more by the end of March — a reversal of the fragile no-change consensus that held before Friday's official inflation data.
The Numbers
Consumer prices rose 3.4% over the past year through August. Gasoline prices jumped 3.9% in August and wholesale diesel surged 24.1%. Core inflation, which strips out food and energy, rose 2.4% — its lowest since early 2021.
Hiring averaged about 71,000 jobs a month over the past three months. The 10-year Treasury yield is sitting on the doorstep of 5%, which MarketWatch calls a warning sign for stocks.
Timeline
The Fed last raised its benchmark interest rate, then spent years holding off on further hikes, wary of doing unnecessary damage to the economy, CNN reports.
Inflation runs faster than workers' paychecks while hiring rebounds, USA Today reports. Gasoline is up 3.9% on the month; wholesale diesel is up 24.1%.
Official data released Friday show firm inflation, flipping the economist consensus from no change to a hike.
Markets price the odds of a quarter-point hike at roughly 85%.
Another surge in oil prices opens the week after more attacks and disruption in the Middle East, Reuters reports, with markets now assuming the Fed lifts rates.
The Fed announces its decision.
Reactions
Economists surveyed by Reuters are no longer split on the move itself: most see a hike this week and at least one more by the end of March.
The bond market is pushing for hikes anyway, MarketWatch reports, even though higher rates will not bring down gasoline prices.
The Center Square's objection is blunt: the Fed can't pump more oil. Rate hikes slow spending and investment; they cannot increase oil production.
CNN frames the worry inside the Fed differently — officials are asking whether one hike will be enough to bring inflation down, or whether they will need several.
What's Next
The decision lands Wednesday. Long-term Treasury yields and mortgage rates have already risen in anticipation of further increases, so borrowers are paying for the move before it is announced.
Reuters' panel expects at least one additional hike by the end of March.
Two questions hang over the rest of the year: whether higher energy prices feed into broader wage and price expectations, and whether a decision to hold would be read by bond markets as a loss of credibility on inflation.
More
The core dispute is what the Fed is actually fighting. This inflation is driven in large part by a supply shock — Middle East conflict cutting into oil supply — rather than overheated American demand, and higher borrowing costs do nothing to add barrels.
Higher rates also cost Washington directly. The federal government is projected to spend more than $1 trillion on net interest this year, and as older debt is refinanced at higher rates, more tax revenue goes to interest payments.
Poll
Should the Fed raise interest rates this week?
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