Fed rate hike widely expected, focus on future signals

Traders are growing more confident that the Federal Reserve will raise rates at Wednesday's meeting. Fed funds futures now imply a 91% probability of a hike; missing that mark would severely damage the central bank's credibility, making it difficult to recover during Chair Warsh's term.

From now on, market reactions will depend on the signals for future policy. Historically, the Fed rarely delivers a single increase and then stops, and rising oil prices are adding fresh upside risk to inflation. That has economists and traders leaning toward the start of a tightening cycle.

Below is a look at the latest forecasts from major financial firms.

Markets are pricing in 52.4 basis points of tightening by December, suggesting another rate hike this year, with a 10% chance of a move at each of the three remaining meetings. Those expectations are likely to shift on Wednesday, especially during Chair Warsh's press conference.

My bias is toward a hawkish outcome. Warsh has worked to establish hawkish credentials and credibility on inflation. He has talked tough but not yet delivered. If the Fed raises rates once and signals that might be sufficient, or if it softens the rhetoric around "we will get inflation to target", then Wednesday's move could backfire on the long end. Of course, he will be judged on a curve because his repeatedly stated preference is to avoid pre-commitment.

So the overall message he will try to convey is: "we don't know what we're going to do next, we will keep and open mind, but we will get inflation back to our 2% target". I think that reads as hawkish, but it will depend on how the tone compares with his earlier statements, which were more adamant and insistent.

Against that backdrop, I expect the US dollar to strengthen on Wednesday. From there, the direction will be set by energy markets and AI.