The Federal Reserve is expected to raise interest rates on Wednesday for the first time since 2023, with traders pricing a 94% chance of a quarter-point increase that would lift the benchmark rate to a 3.75%-4.00% range. The decision caps a brutal stretch for risk assets, with the 10-year Treasury yield touching 5.04%, its highest level since 2007.
Stocks fell for the sixth time in seven sessions on Tuesday as yields climbed. The Dow lost 0.5%, the S&P 500 slipped 0.4% and the Nasdaq fell 0.3%. Asian stocks steadied on Wednesday after four days of losses, with MSCI’s regional index up 0.1% as investors waited for the outcome. Oil’s rally paused, with US crude down 0.6% to $105.15 a barrel after surging more than 20% this month.
Why a hike, not a cut
The Fed has held its benchmark rate at 3.50%-3.75% since December, when most policymakers argued that progress on inflation had stalled only temporarily. That patience ran out over the summer. A blowout August jobs report showed the economy added 162,000 jobs, roughly three times what economists expected and a sharp jump from the revised 21,000 gain in July. Consumer price data has shown little sign of cooling, and inflation has now run above the Fed’s target for more than five years.
Energy prices did the rest. US crude traded near $105 a barrel on Wednesday after supply disruptions tied to the Iran war compounded outages at a key Saudi pipeline and in Libyan oil fields. Saudi Aramco has delayed crude deliveries to some European customers, and the timing for restoring the East-West pipeline, shut after last week’s attack, remains unclear. Diesel prices hit a record $5.85 a gallon this month, a reminder that energy costs pass through to nearly everything else.
Chair Kevin Warsh signaled the shift in August when he said the Fed would ensure inflation cools “at sufficient speed.” After the latest CPI report, a string of major Wall Street firms moved their September calls from a hold to a hike. A Reuters poll of analysts had already pointed toward at least one increase before the end of the year, and the options market has been pricing tightening risk since the jobs print landed.
What history says happens next
Bond traders have locked in the outcome with unusual conviction. Interest-rate swaps tied to the meeting price roughly 23 basis points of tightening. Bloomberg-compiled data going back to 2008 shows that whenever hike expectations have reached this level, the Fed has invariably delivered. The uncertainty is not whether rates rise but what comes after.
A hold, or a hike without clear guidance on further increases, could push investors to demand higher long-term yields as protection against inflation, while shorter-dated yields track the policy path more closely. The 10-year yield at 5.04% is already close to a two-decade peak, and the extra pressure on mortgages, corporate borrowing and equity valuations is a live concern for a stock market that has sold off through most of September.
Gold, which pays no interest, slipped for a third straight session to around $4,285 an ounce. Analysts at OCBC warned that a break below $4,250 support could send bullion toward $4,000 if the Fed signals more tightening ahead, and flagged oil as the key variable for the metal’s path.
The political layer
The decision also carries political weight. Warsh, who took the chair this year, has faced criticism from the White House over tightening into an election season, and the hike would be the first of his tenure. Treasury market functioning has been strained by heavy government issuance and the oil-driven inflation shock, giving the committee little room to signal a pause without undermining its inflation-fighting credibility.
At Warsh’s July meeting, ambiguous guidance on his inflation plan helped trigger a selloff in long-term bonds. This time markets have done the work for him, which narrows the risk of a repeat. The bigger risk runs the other way: any hint that the committee is done hiking could be read as premature relief, and the long end of the curve could sell off again.
For crypto and other risk assets, the math is straightforward. Assets that pay no interest lose relative appeal as cash yields rise, and bitcoin has already felt it, sliding from $81,000 earlier this month to near $76,000 ahead of the decision. Ether, XRP and solana have all given back August gains as yields climbed. Corporate treasuries that bought bitcoin as an inflation hedge this year are now facing the opposite problem: a central bank fighting inflation with rate increases rather than accommodating it.
Traders will watch the statement language and Warsh’s press conference for any hint of whether this is a single correction or the start of a sequence. The Fed announces its decision at 2:00 p.m. Eastern, followed by Warsh’s press conference at 2:30 p.m. Equity futures pointed slightly higher into the announcement, suggesting investors see the hike itself as fully absorbed and are betting on a measured statement.
Whatever the committee says, the backdrop will not have changed by Thursday. Oil remains above $100, the jobs market added three times the expected payroll number last month, and inflation has stayed above target through five years of promises that it would come down. That combination is what turned a year of rate-cut expectations into a hike, and it will still be there when the statement is released.