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The Federal Reserve is expected to raise its benchmark interest rate for the first time in three years as persistent inflation forces tighter monetary policy back onto Wall Street’s agenda. The central bank will announce its latest decision at 2 p.m. ET.

Traders assign a probability above 90% that the Federal Open Market Committee will approve a quarter percentage point increase. Such a move would lift the overnight funds rate target range to 3.75%-4%, according to the CME Group’s FedWatch gauge of futures prices.

The shift in expectations has been swift. One month ago, traders placed the probability at only 36%, anticipating softer inflation figures and continued reluctance from Chairman Kevin Warsh to commit the Fed to a more hawkish policy direction.

Warsh’s remarks at the Fed’s annual symposium in Jackson Hole, Wyoming, began changing that calculation. Discouraging inflation reports and a firming labor market strengthened expectations for action, while crude oil’s resurgence above $100 a barrel because of the Iran conflict added further pressure.

Morgan Stanley economists joined the broader Wall Street shift by changing their forecast from no rate increases this year to two. The firm based its revision partly on Warsh’s public comments, rising oil prices, inflationary expansion in artificial intelligence and a wider move toward expectations for higher rates.

The firm expects the Fed to raise rates this week and again in December. Michael Gapen, chief U.S. economist for Morgan Stanley, wrote, “Not doing so would risk loss of credibility and a potential rise in longer-term risk premia similar to the reaction after the July FOMC meeting.”

If approved, the increase would be the first since July 2023. Since that month, the Federal Open Market Committee has lowered interest rates six times for a combined 175 basis points, equal to 1.75 percentage points.

Investors will also examine the Fed’s updated Summary of Economic Projections. That release contains new outlooks for unemployment, inflation and gross domestic product, along with the dot plot showing individual participants’ expectations for interest rates.

For the first time, the projection grid will include expectations for 2029. Those forecasts will arrive as markets attempt to judge whether this week’s expected action represents a solitary increase or the opening move in a longer tightening cycle.

Fed decision days have been difficult for stocks in 2026. Bespoke Investment Group said the S&P 500 declined on each of the year’s previous five decision days, with the index averaging a 1.5% loss during those sessions.

“The streak of five straight market declines on Fed days is also a historic run,” the firm noted. “The only stretch that saw the S&P 500 decline on more consecutive FOMC meeting days was the seven ending in 2018.”

Economist Joe LaVorgna, who left his Treasury post earlier this year, expects more than one increase. Breaking with his former boss, Treasury Secretary Scott Bessent, LaVorgna said the Fed could raise rates “at least four” times while inflation remains above its 2% target.

LaVorgna said the eventual number depends on when the Middle East war ends and when the inflation dividend from increased supply side capital spending arrives. He called both answers unknowable over the short term but said they should become apparent in the coming months.

Bessent and other White House officials have said they respect the independence of the Fed and Warsh, though they generally see no need for higher rates. President Donald Trump has gone further, threatening to sever trade ties with some nations if the central bank does not cut rates.

Meanwhile, the 10 year Treasury note yield climbed this week to its highest level since 2007 as investors worried that expensive energy would sustain inflation. The benchmark yield reached 5.041% on Tuesday before retreating to about 4.96% as of 7:38 a.m. ET.

DISCLAIMER: GoldInvestors.news is not a registered investment, legal or tax advisor or broker/dealer. All investment/financial opinions expressed by GoldInvestors.news are from the personal research and experience of the owner of the site and are intended as educational material. Although best efforts are made to ensure that all information is accurate and up to date, occasionally unintended errors and misprints may occur.