The Fed decides today on the first possible rate hike since 2023
Tonight at 20:00 the Fed will announce its rate decision, and according to derivatives market pricing the probability of a 25 basis point hike (to 3.75–4.00%) is over 90%. It would be the first rate increase since July 2023 - a reversal after more than two years during which the Fed was trying to cut rates.
The main point is that the central bank, whose job is to cool the economy when it overheats, is now preparing to tighten conditions at a time when the labor market is visibly cooling.
What exactly is happening and why the market won't be moved by the hike itself
Where that over 90% certainty came from. At the end of summer, estimates were far more divided, around a 50-60% chance of a hike after Warsh's hawkish Jackson Hole speech on August 28. The turning point came on September 11, when the August inflation data (CPI +0.4% month-over-month, 3.4% year-over-year) definitively convinced even the hesitant banks. The probability of a hike according to CME FedWatch thus jumped from under 70% to the current 87-93%.
Two conflicting signals that Warsh must reconcile. On one hand, oil prices are above $100 a barrel due to the ongoing Middle East conflict, which keeps inflation above target regardless of what the Fed does with rates. On the other hand, July labor market data: a loss of 23 thousand jobs and significant downward revisions to May and June figures. The Fed is thus facing exactly the type of decision that has no clean solution: a hike will cool inflation but risks accelerating the cooling of employment that is already underway.
Why the decision itself doesn't matter. When the outcome is priced in at 90%, the announcement itself won't move the market - that already happened in previous weeks. Bond yields reacted earlier: the 30-year yield reached its highest level in nearly twenty years, above 5.19%, and the 10-year yield is around 4.68%. The market has already been paid for uncertainty about the Fed's direction in the form of higher yields before the decision itself is made.
What will really move the dollar, gold, and stocks. Not the hike, but three things around it: the Fed vote, whether it will be unanimous or divided, the updated dot plot with the outlook for 2027, and the tone of Warsh's press conference half an hour after the announcement. If the dot plot suggests this is a one-time correction and not the start of a longer tightening cycle, the dollar may weaken and gold may rise - the market would read it as a signal that the Fed sees the energy shock as temporary. If, on the other hand, Warsh hints at further tightening (some economists already expect another hike in December and March 2027), the reaction may be the opposite. And the remaining less than 10% chance that the Fed leaves rates unchanged is, from the perspective of the strength of the reaction, paradoxically a more interesting scenario than the hike itself, precisely because it would be a surprise against the positioning of the entire market.
Here I would deliberately not try to claim whether the hike is the "right" or "wrong" move - that is a question for economists - in my view, an increase is rather a better step than a cut. What I note from a purely market perspective is the asymmetry in the reaction. The market is positioned for a hike so strongly that the room for surprise toward further tightening is small, while the room for surprise toward a hold is quite large, and that is precisely why the minority scenario (no change) would likely move the dollar and gold more than the majority one. The second thing I would watch is how the committee addresses 2027 in the dot plot. Today's hike is one thing, but the market prices the trajectory over the long term.