Pretty much across the board, analysts and observers expect the US Federal Reserve to raise benchmark rates this week by at least 25 basis points.
Prediction markets have the probability at near certainty. Kalshi is currently at 86% for a 25 bps hike. Polymarket is at 84% for the same move.
As inflation remains too warm, even as employment has stayed steady, some observers see the forthcoming decision as a test of Fed credibility and a reminder the institution must stay above politics and maintain independence from the administration.
Roman Ziruk, Lead FX Strategist at Ebury, notes that the 10-year is now at 5%, the first time since 2023.
“The rise in the term premium – the extra compensation investors demand for holding long-dated debt – appears to be the main driver behind the spike in yields,” says Ziruk. “More recently, this has been partly a reflection of the increased geopolitical risk: the ongoing Iran war has fuelled a surge in oil prices, reviving inflation fears and adding a fresh layer of uncertainty as to the path for long-term central bank rates. This is clearly not just a US phenomenon, but a global one. Yields across the major economic areas have all risen in tandem with US Treasuries in recent weeks, pointing to a shared, geopolitically-driven pressure on bond markets that is not confined to the US alone.”
Ziruk also points to fiscal policy as sovereign debt rises not just in the US, now at $40 trillion, but in other nations.
Jesse Marre, Senior Portfolio Manager at Hilbert Group, anticipates a hike too, as the FOMC goes into the meeting.
“When something is that close to fully priced, you create more market disruption by going against the pricing than by going with it. A hike is not outrageous with headline CPI still at 3.4 percent, and it would answer the people who think Warsh was installed purely to cut rates.”
Marre says that “the risk is in the tails rather than the decision. If they hike and the talk is very hawkish, the market starts pricing a proper hiking cycle and the liquidity drain from that hits risk assets.”
The ongoing war in the Gulf does not help, as oil prices rise due to the conflict, nearly all other prices follow. With no end in sight to the fighting, the Trump administration finds itself in a bit of a quandary – especially with midterms just around the corner.
President Trump railed against Fed Chair Kevin Warsh’s predecessor Jerome Powell, calling him names and threatening political prosecution for not doing his bidding and lowering rates. It seems Trump’s pick to lead the Fed will now raise interest rates, which raises the question of how the President will take a rate-hike decision. Will more political drama distract from more important issues? Will Trump deliver a new nickname for an emerging nemesis?
