The Federal Reserve's Open Market Committee meets Tuesday and Wednesday this week, and for the first time in a while, traders are positioning for a rate increase rather than a cut, a shift driven largely by the surge in oil prices tied to the Middle East conflict.
The Fed's current target range is 3.50 percent to 3.75 percent, a level it held at its late-July meeting in a divided 9 to 3 vote. Since then, the picture has shifted. Following a Jackson Hole speech from Fed Chair Kevin Warsh on August 28, markets moved to price a rise to a 3.75 percent to 4.00 percent range as more likely than not. Data from CME Group, as cited by regional outlet The National, now shows roughly 90 percent of trading circles expecting a quarter-point hike when the decision is announced Wednesday at 2 p.m. Eastern time, alongside updated economic projections and the Fed's closely watched dot plot.
The driving force behind the shift is energy prices. Oil has traded above $100 a barrel for weeks, with last week's gain alone reaching roughly 8 percent, as the conflict centered on Iran continues to disrupt Gulf shipping and, more recently, a key Saudi pipeline. The European Central Bank moved first, raising its own rate by a quarter point last week and explicitly citing inflation pressure from the conflict, saying inflation is set to remain well above target for an extended period. As one macro analyst put it, markets are increasingly recognizing that the conflict, and the higher energy costs that come with it, may persist longer than initially hoped, removing the near-term prospect of relief at the pump or at the register.
A rate hike, rather than the cuts the Fed had been delivering for much of the past two years, would mark a notable pivot, and it comes at a delicate moment for households and businesses already adjusting to higher borrowing costs elsewhere in the economy.
Wednesday's 2 p.m. Eastern announcement, along with the updated Summary of Economic Projections and Chair Warsh's press conference, will show how the Fed is balancing energy-driven inflation against other parts of the economy.
Why would the Fed raise rates instead of cutting them?
Oil prices have surged because of the ongoing Middle East conflict, and markets increasingly expect that inflation pressure to push the Fed toward a rate increase rather than a cut.
When will the decision be announced?
The Federal Reserve is scheduled to announce its decision on Wednesday, September 16, at 2 p.m. Eastern time, along with updated economic projections.