Wall Street bets on a rate hike, but the Fed decision could be a close call

Wall Street anticipates the Federal Reserve raising interest rates for the first time in over three years, despite concerns over rising inflation. Matt Luzzetti, chief US economist for Deutsche Bank, believes a hike by a quarter point to a range of 3.75%-4% is highly likely at 93% probability. Economic growth, a rebound in jobs, and slow progress in inflation are cited as reasons for the rate hike.

Inflation readings have shown some improvement but prices remain stubbornly high, with oil prices above $100 due to Middle East tensions. While economists agree a hike is possible, there is uncertainty surrounding the Fed's ability to maintain tight monetary policy. JPMorgan Chase's Michael Feroli considers the decision a toss-up between raising rates or keeping them steady, citing the Fed's core PCE index at 3% and Fed Chairman Kevin Warsh's warnings on inflation intolerance.

Warsh has urged the Fed to demonstrate that underlying inflation is moving towards their target, while also emphasizing financial condition must be restrictive. Feroli estimates the core PCE at 2.7% through August, suggesting progress but cautioning against premature rate hikes. Energy prices and tariffs are seen as supply shocks that hikes cannot address, potentially causing harm to employment.

Moody's chief economist Mark Zandi argues against a rate hike, emphasizing the need for the Fed to tackle AI-driven investment that fuels the economy, while addressing non-AI economic struggles. The Fed is expected to raise rates three times this year, with the first hike on Wednesday, followed by another in December and next March.

Fed officials will present their projected interest rates in a 'dot plot' after the decision. If the Fed raises rates, it is anticipated to be unanimous, while a hold would likely see the same trio of dissenting officials. The Fed's decision will be released at 2 p.m. ET on Wednesday, with Warsh's press conference following at 2:30 p.m. ET.