August inflation data out of the US did nothing to allay fears that the Fed’s inflation target is still out of reach, triggering investors to price in a near certainty of a hike this week.
There is still significant uncertainty, of course, as Fed officials cannot make pronouncements on monetary policy this close to the meeting, while Chair Warsh has severely cut back the Fed’s guidance to markets. We now expect a hike, however, and with futures pricing in a 90% chance of a 25 basis point move, failure to follow through would send shockwaves through markets and probably add fuel to the sell-off in long-term rates. Whether the FOMC validates aggressive markets bets for rate increases beyond then remains an open question.