The US Federal Reserve is widely expected to raise interest rates at the conclusion of its two-day policy meeting on Wednesday, with futures markets pricing in a 92% to 92.5% probability of a 25 basis point hike, according to the CME FedWatch Tool and multiple sources [1][3][4]. This expectation follows strong US Nonfarm Payrolls data, persistent inflationary pressures, and recent increases in both the Consumer Price Index (CPI) and Producer Price Index (PPI) for August, with headline CPI at 3.4% year-over-year and PPI accelerating to 5.4% from 4.8% in July [2][3].
The anticipation of tighter US monetary policy has driven the US Dollar to outperform major peers, with the Dollar Index (DXY) trading near two-week highs around 99.60–99.62 and the 10-year US Treasury yield testing the 5% threshold, its highest level since 2007 [2][3]. This has led to notable currency moves: the New Zealand Dollar (NZD/USD) has dropped over 2.5% in September to two-month lows below 0.5765, and the Swiss Franc (USD/CHF) is near one-and-a-half-month highs for the Dollar, with the Franc depreciating nearly 1.2% in September [1][4]. Gold (XAU/USD) remains under pressure, trading near $4,280 after touching a one-month low of $4,253, as higher yields and a stronger Dollar increase the opportunity cost of holding non-yielding assets [2].
Market participants and analysts broadly agree that the Fed will not stop at a single hike. According to a CNBC Fed Survey, 86% of respondents expect at least two rate hikes over the next year, with 55% forecasting more than one and a third predicting three or more [5]. BNY Mellon strategists expect a hike this week and probably one more this year, though they caution that the path to even higher rates is fraught with obstacles [2][3]. The swaps curve implies a policy rate at 4.25% in the next two years, while the Fed's own projections are more modest [1].
The market impact extends beyond the US. Global bond yields are rising, and risk aversion is heightened due to the Middle East war and energy shocks, which have pushed oil prices higher and complicated the inflation outlook [1][2][5]. Most CNBC survey respondents believe the Strait of Hormuz will remain closed for at least another month, keeping oil prices elevated for over six months [5]. This has led to concerns that inflation is becoming more broad-based, with CPI forecasts rising to near 3.5% for this year and 2.85% for 2027 [5].
Despite the hawkish shift, the growth outlook remains steady, with US GDP expected at 2.25% this year and next, and the S&P 500 forecast to rise 8% in 2025 [5]. However, some analysts question whether the Fed can tame supply-driven inflation with rate hikes, and warn of potential risks to growth if tightening persists [5].
CONCLUSION
Markets are bracing for a widely expected Fed rate hike, with strong consensus for further tightening amid persistent inflation and rising global yields. The US Dollar has strengthened, while risk assets and non-yielding currencies have come under pressure. The outlook remains cautious, as analysts debate the Fed's ability to control inflation without derailing growth.