Federal Reserve is in the hot seat this week as the Federal Open Market Committee (FOMC) gears up for a crucial vote on interest rates. Markets are bracing for a quarter percentage point hike come Wednesday, with futures traders pegging the odds at a solid 92%. There's also a strong chance they're eyeing another increase in December.
This decision lands amid climbing inflation, fueled by rising fuel costs and recent data that shows prices continuing to rise through August. The Fed has previously signaled that it might need to step in unless inflation eases back to the 2% target. But it's a tangled situation. The Fed has a history of dismissing temporary factors like tariffs and energy supply shocks, both of which are currently pushing inflation up.
Economists are split on whether a rate hike is necessary. Goldman Sachs economist David Mericle says the inflation overshoot is largely due to temporary factors that might fade. Yet, despite this, Goldman has shifted and now backs a rate hike, mainly because that's what the market expects.
Back in July, the FOMC's last meeting ended with a 9-3 vote to keep rates steady. The dissenters, regional presidents Lorie Logan, Beth Hammack, and Neel Kashkari, favored a quarter-point hike then. If they haven't changed their minds, four more members would need to flip to support a hike this week.
Governor Christopher Waller is a pivotal voice here, backing the idea of holding rates steady. He emphasizes patience and the need to confirm trends in disinflation. Waller questions the rush for a hike, arguing that a 25 basis point bump won't immediately bring inflation down to the 2% target.
New York Fed President John Williams and Governor Michael Barr are also for a cautious approach. Williams thinks inflation has already peaked, while Barr is open to a hike but hasn't committed. On the flip side, Warsh and Governor Lisa Cook are expected to back a hike, with Cook ready to take on inflation head-on.
Some other members, like Philadelphia Fed President Patrick Harker and Chicago's Austan Goolsbee, are urging patience. Meanwhile, Governors Philip Jefferson, Jerome Powell, and Michelle Bowman have been keeping their cards close to their chest.
The vote's outcome will show just how divided the committee is. It will also put leadership to the test, as the aim is to bring the FOMC together. A unified stance could emerge if those on the fence decide to side with the majority.
David Kelly, chief global strategist at JPMorgan Asset Management, pointed out that if the Fed decides to raise rates, it may not seem like a close call later. A majority decision might prompt others to align, presenting a united front to the public and the President.
After the vote, all eyes will be on the Fed's "dot plot" update, which lays out rate expectations for all 19 meeting participants. Investors will be eager to see the level of support for two hikes this year and what the outlook is for 2027, including an early look at 2029.
Typically, the Fed doesn't make one-off rate changes but moves in cycles. A tight vote could signal participants' mixed feelings about starting the hike and a wish to keep market expectations in check.
The press conference on Wednesday afternoon will be key in conveying the FOMC's sentiment. Former New York Fed President Bill Dudley stressed the importance of the Fed explaining its economic perspective and following through with action to maintain credibility.
