Something is shifting in how investors think about interest rates, and it happened faster than almost anyone expected. A month ago, most traders barely believed the Federal Reserve would raise rates again this year. Now, the mood on Wall Street has flipped almost entirely in the other direction, and the change says as much about oil prices and stubborn inflation as it does about anything the Fed itself has said.
Traders have assigned better than 90% odds that the Federal Open Market Committee will vote to raise its benchmark interest rate by a quarter of a percentage point, which would push the target range to between 3.75% and 4%. That figure comes from the CME Group Inc. (NASDAQ: CME) FedWatch tool, which tracks futures pricing to gauge what investors expect the Fed to do. Just a month earlier, those odds sat at only 36%, reflecting a market that expected soft inflation numbers and a Fed chair reluctant to commit to a firmer policy path.
That chair, Kevin Warsh, is a big part of why the outlook changed. His comments at the Fed’s annual gathering in Jackson Hole, Wyoming, began nudging expectations toward a hike. Since then, a run of disappointing inflation data and a labor market that keeps showing strength have added weight to the case. On top of that, crude oil has climbed back above $100 a barrel amid the conflict involving Iran, adding another layer of inflationary pressure that makes it harder for the Fed to stay on the sidelines.
Morgan Stanley (NYSE: MS) offers a good example of how quickly sentiment has moved. The firm’s economists reversed course this week, shifting their forecast from no hikes at all this year to two, citing Warsh’s public remarks, the renewed climb in oil prices, inflationary pressure tied to the buildout of artificial intelligence, and the broader shift in market expectations. Morgan Stanley now expects one increase this week and another in December.
Michael Gapen, the firm’s chief U.S. economist, explained the reasoning in a note released Monday. He wrote that failing to raise rates now would risk a loss of credibility for the central bank and could push up longer term risk premiums, similar to what happened after the Fed’s July meeting.
If the committee follows through, this would be the first rate increase since July 2023. It would also mark a reversal after a long stretch in the opposite direction, since the FOMC has cut rates six separate times since then, trimming a total of 175 basis points, or 1.75 percentage points, off its benchmark rate.
There is more for investors to watch this week than just the rate decision itself. The committee is also set to release its updated Summary of Economic Projections, a document that lays out fresh expectations for unemployment, inflation and gross domestic product. It includes the so called dot plot, which shows where individual Fed officials expect interest rates to land in the years ahead. Notably, this update will extend that outlook to include 2029 for the first time, giving markets their first real look at how policymakers think about rates several years out.
None of this guarantees the Fed will actually raise rates this week. But the shift in expectations, from a coin flip a month ago to near certainty now, shows how quickly the calculus can change when inflation data, labor market strength and geopolitical shocks all point in the same direction at once. For anyone trying to make sense of where borrowing costs are headed, this week’s decision and the details buried in the accompanying projections are likely to matter more than usual.
