US interest rate hike bets jump to 90% ahead of Fed decision on Wednesday

The current US interest rate is within the range of 3.50%-3.75%, after the Fed decided in its previous meeting in July to keep it unchanged, while the markets currently predict, if the Council decides to raise rates, an increase of 25 basis points raising the range to 3.75%-4.00%.

For Jordan, the US decision is of direct importance in light of the dinar's peg to the dollar, making global interest rate developments, especially those in the US, one of the factors that enter into local monetary policy calculations, while the Central Bank of Jordan's key interest rate currently stands at 5.75%.

- Rapid reversal in market expectations

The importance of the September meeting is highlighted by the speed of the shift in market and economist expectations over less than a week.

In a Reuters poll published on September 9, more than two-thirds of economists surveyed expected the Fed to keep interest rates unchanged during its current meeting and to continue to do so until the end of the year.

However, the picture changed dramatically after the release of US inflation data, as the latest Reuters poll, conducted following the release of the data, showed that 86 out of 101 economists, or 85%, now expect the Fed to raise rates by a quarter percentage point at the September 15-16 meeting, compared to a clear majority that expected a hold just days earlier.

In the markets, interest rate futures are pricing in a nearly 90% probability of a rate hike during the current meeting, and several possible increases are being priced in until July of next year, reflecting a change in investor expectations about how long the Fed may need to counter inflationary pressures.

However, these percentages remain an expression of market expectations at a specific moment in time and are not an official indication from the Federal Reserve on the decision to be issued on Wednesday.

- Inflation reshapes the landscape

The major shift in expectations came after official data showed that the US Consumer Price Index rose 0.4% in August on a monthly basis, following a 0.1% increase in July, while the inflation rate stood at 3.4% on an annual basis.

Data from the US Bureau of Labor Statistics showed that gasoline prices rose 3.9% in August, accounting for more than a third of the monthly increase in the Consumer Price Index.

The energy index as a whole rose 2.1% over one month and 16.3% compared to August of last year, while fuel oil recorded a monthly increase of 10.1%, reflecting the extent of the pressure exerted by energy on the overall price level.

These developments are of additional importance to the Fed, as inflation remains above its target of 2%, while rising oil prices increase concerns about the persistence of price pressures or their gradual transition to other sectors of the economy.

The Fed had already indicated in its previous meeting that inflation remained high compared to its target and that supply shocks had contributed to rising prices in sectors including energy.

- The division appeared before the September meeting

The pressure towards raising rates did not start with August's data only, as the minutes of the previous meeting of the Federal Open Market Committee showed that the decision to keep rates unchanged in July was not unanimous.

Nine members voted in favor of maintaining the target range at 3.50%-3.75%, while three members opposed the decision and preferred to increase rates by 25 basis points.

This means that the option to raise rates was already on the table within the committee before the latest inflation data was released, before market expectations towards it strengthened in recent days.

However, the final outcome still depends on the committee's vote and its assessment of the overall economic data and balancing the risks of inflation with the conditions of economic activity and the labor market.

Parallel to the shift in interest rate expectations, the yield on US Treasury bonds for ten years exceeded the 5% level on Monday, for the first time since October 2023, reaching about 5.01% during trading.

Bond yields are not driven by monetary policy expectations alone; inflation fears linked to rising oil, along with increased US debt issuance, higher borrowing to finance AI-related investments, and concerns about the US deficit and public debt, have put pressure on bond prices and raised their yields.

The yield on ten-year bonds is of broad importance beyond the US debt market, as it represents one of the most prominent benchmark prices for financing in the global economy, and its movements affect the cost of mortgages, corporate credit, consumer loans, and the pricing of many assets.

Thus, the Fed enters its meeting amid a more complex equation: inflation above target, a shock in energy prices, and long-term yields that have reached levels not seen in nearly three years.