The Federal Reserve is widely expected to raise interest rates on Wednesday for the first time under Chairman Kevin Warsh, but the size of the vote margin remains uncertain after the committee split 9-3 in July. Hotter August inflation and oil above $100 a barrel have pushed traders to price in a near-certain hike, even as some economists warn the move could be a mistake.
Futures traders were pricing in better than a 92% probability of a quarter-point rate increase at this week's Federal Open Market Committee meeting, as of Monday afternoon. The Fed's benchmark rate currently sits at 3.50% to 3.75%, and a hike would lift it to a 3.75%-4.00% range, with the decision due at 2 p.m. EDT Wednesday.
A split committee awaits Warsh
The FOMC voted 9-3 in July to hold rates steady, with regional presidents Lorie Logan, Beth Hammack and Neel Kashkari dissenting in favor of a hike. For a hike to pass this week, at least four other members would need to switch their votes from hold to hike.
Governor Christopher Waller urged patience earlier this month, arguing that hiking now would not quickly bring inflation to target. New York Fed President John Williams also favored a wait-and-see approach. But strategists note that if a majority coalesces around a hike, other members may join to present a united front.
Inflation and oil prices force the issue
Fed officials had signaled they wanted clearer evidence that inflation was cooling before acting again. Instead, headline CPI ran at 3.4% in August, while core inflation eased slightly to 2.4%. Separately, core consumer prices excluding food and energy rose 0.3% from the prior month, the Bureau of Labor Statistics reported.
Oil prices have also climbed above $100 a barrel amid renewed hostilities in the Middle East, adding to price pressure. As a result, several policymakers who had counseled patience are now seen as more likely to back a hike this week.
Some economists warn of a mistake
Not everyone agrees a hike is the right call. According to MarketWatch: "The odds of a serious Fed policy mistake are uncomfortably high and rising," warned Mark Zandi, chief economist at Moody's Analytics.
Carl Tannenbaum of Northern Trust said holding rates steady would give the Fed more time to assess whether there are potential cracks in the foundation of the expansion. Michael Strain of the American Enterprise Institute argued the market is misreading the committee's center of gravity, which he said still favors holding rates unchanged.
Sources: CNBC, Reuters via Investing.com, MarketWatch
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