Fed Rate-Hike Bets Flip as Inflation Forces a Sharp Repricing

A consensus overturned in days

Eighty-six of 101 economists surveyed after Friday’s inflation report expect the Federal Reserve to lift its benchmark rate by a quarter point on Wednesday, taking the target range to 3.75%–4.00%.reuters +1 That 85% majority reverses last week’s view, when more than two-thirds of respondents expected no change.cutoday +1 Futures markets put the probability of an increase near 90%, making a hike the dominant expectation rather than a settled outcome.qz +1

The pivot would produce the first Fed increase since July 2023 and the first under Chair Kevin Warsh.cutoday +1 Goldman Sachs, JPMorgan, HSBC and Deutsche Bank are among the institutions that switched to a quarter-point call as the outlook hardened.qz +1

Inflation has narrowed the Fed’s room

The August consumer-price index rose 0.4% from July and 3.4% from a year earlier. Core prices, excluding food and energy, increased 0.3% on the month, above the 0.2% consensus forecast, even as the annual core rate eased to 2.4%.qz +1 Those details weakened confidence that inflation is moving steadily toward the Fed’s 2% objective.

Energy adds a fresh complication. Gasoline prices climbed 3.9% in August and accounted for more than one-third of the monthly CPI increase, while crude above $100 a barrel has lifted concern about the next round of price pressures.qz +1 Producer-price components have also encouraged forecasters to expect an August acceleration in core personal-consumption-expenditures inflation, the Fed’s preferred gauge.reuters +1

The signal after the decision matters more

Nearly 53% of economists providing longer-range forecasts now expect at least one additional increase by the end of March.cutoday Wednesday’s updated projections, the vote and Warsh’s message on inflation will therefore matter as much as the immediate decision. A forceful inflation stance could reassure long-term bond investors; projections showing several more increases could instead push borrowing costs higher.nationalmortgageprofessional

For households, the effects will differ by loan type. Credit cards and variable-rate home-equity lines are closely tied to short-term rates, while fixed mortgages respond more to Treasury yields, inflation expectations and mortgage-backed securities demand.nationalmortgageprofessional The average 30-year fixed mortgage rate reached 6.76% in the week ended September 10 as the 10-year Treasury yield approached 5%.nationalmortgageprofessional Markets have largely priced the first move; the harder question is whether policymakers are beginning a sustained tightening cycle.