Fed Decides Today: Rate Set for First Hike Since 2023

The US Federal Reserve announces its interest rate decision today at 2 p.m. Eastern Time, at the end of the two day Federal Open Market Committee meeting held on September 15 and 16. A survey of economists shows that 86 of 101 respondents expect a 0.25 percentage point hike in the key rate, to a range of 3.75 to 4.00 percent, while the derivatives market has priced the probability of a hike at around 90 percent. If it happens, this will be the Fed’s first rate hike since July 2023.

Behind the shift is inflation that refuses to ease. Core inflation in the United States stood at 2.4 percent year on year in August, while the consumer price index came in at 3.4 percent. Oil prices, driven up by tensions in the Middle East, have stayed above 100 dollars a barrel, adding further pressure on prices. Inflation in the United States has not returned to the 2 percent target in five years, even as the unemployment rate has stayed stable.

The government bond market has already reacted. The yield on the 10 year US Treasury note hit 5.012 percent during trading on September 14, the first time it topped 5 percent since October 2023, before easing back to 4.955 percent by midday. Had the trading day closed above 5 percent, it would have been the first such close since July 2007, but the yield fell back below that level before trading ended.

Goldman Sachs has changed its forecast: as recently as a week ago the bank expected the Fed to hold rates steady, and now predicts a 0.25 percentage point hike. J.P. Morgan goes further, expecting hikes in both September and December. At least one more hike by March 2027 is expected by 37 of the 70 economists surveyed.

At its July meeting the Fed left rates unchanged, but three FOMC members already voted for a hike at the time. The current survey marks a reversal from last week, when more than two thirds of economists expected rates to stay the same.

Djordje Djukic, a full professor at the Faculty of Economics in Belgrade, says the bond market is already sending a clear signal:

“Compared to yesterday, the situation is even more complicated, and I would say it supports the view that there is a 90 percent probability that most members of the Federal Open Market Committee (FOMC) will vote to raise the Fed’s key interest rate.”

According to him, a rate hike will not remove inflationary pressures on its own, but it serves another purpose:

“FOMC members are aware that raising interest rates will not remove inflationary pressures, but it will ease the rise in inflation expectations, which are even more dangerous.”

Djukic also points to the position of Fed Chair Kevin Warsh, whose signals to the market have been unclear:

“Warsh, who has been sending unclear signals, is now at a turning point. Unclear signals only push the risk premium on the bond market further up, which is bad above all for the executive branch.”

His final point concerns the credibility of the central bank itself:

“Essentially, if a majority votes to raise interest rates now, it will signal to the world’s biggest investors that the Fed has demonstrated its actual independence.”

For Serbia, the Fed’s decision is not just American news. Higher US interest rates make dollar borrowing more expensive for the state and for domestic companies that finance themselves on foreign markets, and keep upward pressure on bond yields across the region, including Serbian eurobonds. Higher US yields typically pull capital out of emerging market bonds, so domestic debt issuers also pay a higher premium when they go to market.

The Fed’s decision comes as President Donald Trump publicly demands lower rates and threatens trade restrictions if the central bank does not give in, while current expectations point in the opposite direction from what he wants. That makes the political pressure on the Fed all the greater ahead of tonight’s announcement.