Markets brace for the Fed's first interest rate hike in three years, decision due this afternoon

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The Federal Reserve's two day September meeting concludes this afternoon with a policy decision at 2pm Eastern, and for the first time in a long stretch of holds and cuts, markets are broadly pricing in an actual rate hike as the more likely outcome. The current target range sits at 3.50 to 3.75 percent, held steady since July, but Chair Kevin Warsh's hawkish remarks at the Jackson Hole symposium in late August shifted market expectations meaningfully, with pricing for a September increase moving above fifty percent in the days following that speech.

Warsh specifically pointed to twelve month PCE inflation running at 3.7 percent during his Jackson Hole remarks, describing progress on bringing inflation down over the past two years as merely modest, and said the committee needed to be confident inflation is moving toward its target clearly and at sufficient speed before easing further. He also notably declined to offer the kind of forward guidance markets often rely on, framing the committee's approach instead as a discipline rather than a fixed decision, language that left plenty of room for a hawkish surprise.

The labor market backdrop has held up reasonably well too, which removes one of the more obvious arguments against raising rates. August's employment report, released September 4th, showed nonfarm payrolls up 162,000 with unemployment holding steady at 4.1 percent and average hourly earnings up 0.3 percent on the month. A steady labor market alongside persistently elevated inflation is exactly the kind of combination that tends to tip a data dependent Fed toward tightening rather than standing pat.

A quarter point hike would lift the target range to 3.75 to 4.00 percent, and given that this meeting also comes with an updated Summary of Economic Projections and dot plot, the more consequential part of the afternoon may end up being less about the headline rate move itself and more about what the dot plot signals for the pace of any further tightening into next year. Warsh's press conference at 2:30pm will be watched just as closely as the rate decision itself for exactly that reason

Fed Interest Rate Decision: US Rates Rise to 3.75%-4.00%cambridgecurrencies.com

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The dot plot mattering more than the headline decision itself is such an underappreciated point for casual market watchers who tend to only focus on whether rates went up, down, or stayed the same. The forward guidance embedded in those projections often moves markets more over the following weeks than the actual announced decision does on the day itself. Going to be watching that just as closely as the 2pm headline number