Fed Poised to Raise Rates for First Time in More Than 3 Years; 85% of Economists See Quarter-Point Move This Week

Stronger-than-expected U.S. inflation pressures have led most economists to conclude the Federal Reserve will raise interest rates this week for the first time in more than three years.

A Reuters survey of 101 economists conducted after the September 11 inflation report found 86 respondents, or 85%, expect the Fed to raise its benchmark rate by 0.25 percentage point at the September 15-16 Federal Open Market Committee meeting. If that happens, the target range would increase to 3.75%-4.00% from 3.50%-3.75%. It would be the Fed's first rate increase since July 2023.

Market expectations have swung sharply in just a week. In last week's Reuters poll, more than two-thirds of respondents expected the Fed to leave rates unchanged. That shifted after consumer prices came in hotter than expected, making a rate hike the consensus view.

Expectations for additional tightening are also spreading. Of 70 economists who answered a question on the rate outlook, 37, or about 53%, expect the Fed to raise rates at least once more by the end of March next year. Forecasts calling for rate cuts in 2027 no longer make up a majority.

Interest-rate futures are pricing in about a 90% chance of a rate increase this week. Market pricing also reflects the possibility of about four rate hikes by the end of July next year.

Inflation was the decisive trigger behind the shift in expectations. After the consumer price index came in stronger than expected, detailed producer-price components that feed into the personal consumption expenditures price index, the Fed's preferred inflation gauge, also stayed elevated. Many economists believe August core PCE inflation rose again.

Higher oil prices tied to the war in the Middle East are also adding to inflation concerns. International crude prices have climbed well above $100 a barrel, while diesel prices have surged to record levels. Inflation expectations are also rising.

The bond market is also seen as pressuring the Fed's decision. Even after U.S. Treasury Secretary Scott Bessent announced a $6 billion Treasury buyback, the 10-year Treasury yield remained near 5%. Investors worry that if the Fed leaves rates unchanged at this meeting, longer-dated Treasury yields could jump instead.

Scott Anderson, chief U.S. economist at BMO Capital Markets, said the Fed's inflation-fighting credibility is on the line. Failing to back up hawkish rhetoric with action at this meeting, he added, could leave the U.S. Treasury yield curve at risk of becoming much steeper.