Fed Nears First Hike Since 2023 as Odds Top 85%

Markets now price an 85% chance the Federal Reserve raises rates on September 16, setting up the first hike since 2023 despite Trump's demands for cuts.

Traders have flipped decisively toward a rate hike at the Fed's September 15-16 meeting. According to The Edge Malaysia, odds of an increase moved above 85% in futures markets after Friday's report showed core inflation growing faster than expected in August. Streamline Feed reports the odds jumped from 66% to above 85% in three weeks, and that TD Bank and JPMorgan quickly revised their calls to expect a hike this week.

The political reversal is stark. Trump picked Warsh as Fed chair expecting rates to come down, praising him at the May swearing-in and urging him to be "totally independent," The Edge Malaysia reports. Instead, on Sunday Trump repeated that the US "should be paying the lowest interest rate in the world, regardless of their formulas," Investor's Business Daily reports, while AgroLatam notes a hike would mark the first increase of Warsh's tenure and arrive weeks before November's congressional elections. National Economic Council Director Kevin Hassett said Friday the president "will have something to say about it" if the Fed hikes, though he softened Sunday, saying Trump "will defend the independence of Kevin Warsh above all," according to The Edge Malaysia.

Multiple pressures point toward tightening. USA Today reports year-over-year consumer inflation stood at 3.4% in August, above the Fed's 2% target, with gas prices up 3.9% helping drive the monthly rise, and employers adding 162,000 jobs. Warsh said last month he wanted inflation moving toward 2% "clearly and at sufficient speed." Inside the FOMC, Cleveland Fed's Beth Hammack, Dallas Fed's Lorie Logan, and Minneapolis Fed's Neel Kashkari dissented from July's hold in favor of a hike, and Hammack wrote that "policy is not restrictive" and "it's time to act," USA Today reports. AgroLatam adds that core prices rose 0.3% in August, a pace inconsistent with a smooth return to 2%.

CNN's analysis raises a deeper question about whether hikes can even tame this inflation. CNN reports the July minutes said "several" committee members worried the massive data-center buildout could have "broader effects on prices by pushing up aggregate demand." Spending on data centers is running at an estimated $800 billion, per a PwC report cited by CNN, with Gartner estimating $1.37 trillion in data center spending in 2026. New York Fed President John Williams identified the buildout as his primary inflation concern, and Morgan Stanley's Jim Caron and Vanguard's Ian Kresnak told CNN that hyperscalers with strong balance sheets may not slow spending much at higher rates.

A quarter-point hike would ripple through household and business balance sheets. USA Today reports credit card APRs could rise within one to two billing cycles, HELOC and variable-rate payments would climb, while savers typically see higher yields on savings accounts and CDs. AgroLatam notes tighter policy keeps operating credit, machinery financing, and farmland borrowing more expensive for farmers already managing elevated input costs. Crypto is also de-risking: CoinGape reports Bitcoin open interest fell 13.5% between September 3 and 11, Bitcoin ETFs saw $462.73 million in weekly outflows, and CME FedWatch showed 86.5% odds of a hike, with BTC near $78,000.

Wednesday's decision arrives with the Fed's Summary of Economic Projections, which USA Today notes will show where officials see rates heading; traders are split on October, with a little more than half expecting a hold at 3.75%-4.00%, and a little less than half betting on a December move to 4.00%-4.25%. AgroLatam reports analysts expect projections could signal another increase before the end of 2026. Bloomberg Economics, cited by Streamline Feed, put it bluntly: "If the Fed does not hike, Warsh will lose credibility in the eyes of market participants." The open question after Wednesday is whether September is a single adjustment or the start of a new tightening cycle.