Fed poised to raise rates amid stubborn inflation

The Federal Reserve is preparing to increase interest rates by a quarter-point this week, marking its first adjustment since 2023 and signaling potential further tightening ahead. Financial markets now anticipate an 86% likelihood of a 25-basis-point rise, up from 70% just weeks earlier, following stronger-than-expected inflation readings and a more aggressive stance from Federal Reserve officials.

Several factors are influencing this decision, including recent comments from Fed Chair Kevin Warsh during the Jackson Hole symposium and the August jobs report, which showed 162,000 new positions added—far exceeding forecasts.

Inflation remains a persistent challenge, with core consumer price inflation holding steady at 2.4% and core personal consumption expenditure inflation near 3.2%, both figures exceed the Fed’s 2% target. During the June policy meeting, half of the Federal Reserve’s officials indicated they now expect at least one rate hike this year, and the central bank has abandoned its earlier easing stance. However, the latest inflation data contradicts the Fed’s stated requirement for a clear downward trend before taking action.

While higher borrowing costs have not yet dampened economic growth, sensitive areas such as housing and corporate debt could face increased strain. Shane Oliver, chief economist at AMP Capital, noted that the Fed’s move would bring its policy in line with other major central banks, including the European Central Bank, which raised rates to 2.5% last month, and the Reserve Bank of Australia, which has implemented three hikes this year.

Globally, central banks are adopting a more restrictive approach. The Bank of England has maintained its current rates while closely watching energy and commodity price fluctuations, though rising food price projections, a 6% annual increase expected by mid-2027, could prompt future rate adjustments. Meanwhile, Japan’s central bank may soon join the tightening trend, with a 25-basis-point increase at its next meeting now considered likely, though a larger 50-basis-point move remains unlikely.

The Federal Reserve’s decision will shape expectations for further policy shifts. Mark Dowding, chief investment officer at RBC BlueBay Asset Management, suggested the move could either mark the beginning of a broader tightening campaign or represent a one-time adjustment. His remark, “hike or go take a hike”, highlights ongoing uncertainty about whether this action signals a lasting change or merely a brief response.