Wall Street’s expectations for Federal Reserve policy have shifted sharply in a matter of days, with economists now overwhelmingly forecasting a quarter-point interest-rate increase Wednesday and many expecting the move to mark the beginning of a renewed tightening cycle rather than a one-off adjustment.
Eighty-six of 101 economists surveyed by Reuters after Friday’s inflation report — about 85% — expect the Fed to raise its benchmark rate to a range of 3.75% to 4.00% at its September 15-16 meeting. Just a week earlier, more than two-thirds of economists surveyed had expected policymakers to leave rates unchanged.
The reversal followed another firm inflation reading and a broader run of economic data that has made it increasingly difficult for the Fed to justify staying on hold. Consumer prices rose 0.4% in August, accelerating from 0.1% in July, while annual inflation reached 3.4%. Core prices increased 0.3% during the month and 2.4% from a year earlier.
Markets have moved even further. Interest-rate futures were pricing close to a 90% probability of a hike this week and roughly four increases by the end of July 2027, according to Reuters.
The more important change for investors is that Wednesday’s decision may no longer be viewed as the end of the story.
More Economists Now Expect Another Hike
Among economists who provided forecasts beyond this week’s meeting, 37 of 70 — roughly 53% — expect at least one additional rate increase by the end of March 2027.
That represents another major shift. In Reuters’ previous poll, 56% of respondents expected rates to remain unchanged over that period. There is also no longer a majority forecast for lower U.S. interest rates during 2027.
A quarter-point move Wednesday would lift rates from the current 3.50%-3.75% range, which the Fed maintained at its July meeting. Three policymakers dissented in July and favored raising rates then, while the majority said economic growth remained solid and inflation was still elevated relative to the Fed’s 2% target.
That July split now looks more significant.
Inflation has remained stubborn, energy prices have risen sharply and several producer-price components that feed into the Fed’s preferred Personal Consumption Expenditures inflation measure have also strengthened. Reuters reported that economists increasingly expect core PCE inflation to have accelerated in August.
Oil adds another complication.
Brent crude moved above $108 a barrel Monday amid renewed Middle East supply concerns, increasing the risk that energy costs feed back into transportation, manufacturing and consumer prices.
The Fed does not normally respond aggressively to every temporary oil move. But persistently higher energy prices become harder to ignore when underlying inflation is already above target.
Bond Market Is Already Pricing a Tougher Fed
Treasury markets have moved quickly as rate expectations changed.
The 10-year Treasury yield briefly rose above 5% Monday for the first time since October 2023, touching about 5.01%. Higher oil prices, expectations for tighter Fed policy, heavy debt issuance and concerns about persistent inflation have all contributed to the recent bond selloff.
That move has consequences well beyond government bonds.
Treasury yields influence mortgage rates, corporate borrowing costs, auto loans and the discount rates investors use to value stocks. A sustained 10-year yield near 5% also gives investors a more competitive alternative to equities, particularly when stock valuations are elevated.
For the Fed, rising long-term yields create an unusual problem. Keeping short-term rates unchanged while inflation remains firm could theoretically push longer-term yields even higher if bond investors begin doubting the central bank’s commitment to price stability.
Several economists in the Reuters survey argued that this credibility risk now strengthens the case for acting Wednesday.
At the same time, additional hikes carry their own risks. Monetary policy works with a delay, and higher borrowing costs eventually weigh on housing, consumer credit, corporate financing and investment.
That tension is why Wednesday’s decision itself may be less important than what policymakers signal about the months ahead.
New Fed Projections Could Matter More Than the Hike
The September meeting includes an updated Summary of Economic Projections, meaning investors will receive fresh Fed estimates for growth, unemployment, inflation and the future path of interest rates alongside the policy decision.
Those projections may provide the clearest indication of whether officials see Wednesday’s expected increase as an insurance move against inflation or the beginning of a longer tightening cycle.
Fed Chair Kevin Warsh has moved away from providing the kind of explicit forward guidance markets relied on under previous leadership, which makes the projections and his Wednesday press conference particularly important.
The policy announcement is scheduled for 2 p.m. Eastern on September 16, followed by Warsh’s press conference at 2:30 p.m.
A quarter-point hike is now widely expected. The bigger market question is how many more could follow — and whether the Fed can bring inflation lower without pushing borrowing costs high enough to materially weaken the economy.