Markets Price in 92.5% Probability of Fed Hiking Rates by 25 Basis Points Today in First Increase Since 2023

Financial markets see a 92.5% probability that the U.S. Federal Reserve will move to raise interest rates by 25 basis points during the monetary policy committee meeting scheduled for today, September 16, marking what would be the first rate hike since 2023.

These high expectations come in response to economic data that continues to point to the resilience of the U.S. economy and the strength of the labor market, alongside indicators showing persistent inflationary pressures above the Fed's 2% target. Combined, these factors have reinforced traders' conviction that the central bank will resume its monetary policy tightening cycle.

This potential decision marks a turning point in the trajectory of U.S. monetary policy following an extended pause, and its impact will reverberate across global markets, particularly in emerging nations and those that peg their currencies to the dollar or have partially dollarized economies, including several countries in the Arab region.

The decision will enhance the dollar's appeal against other currencies and exert pressure on yields in emerging markets, casting a shadow over sovereign borrowing costs and external debt in a number of affected markets.

What do these terms mean?

Basis point: A unit of measure used by central banks equal to 0.01%, meaning that 25 basis points represents an interest rate increase of one-quarter of a percent.

Federal Reserve (Fed): The central bank of the United States, whose decisions regarding interest rates influence the global economy due to the dollar's standing as the world's primary reserve currency.

Tight monetary policy: Raising interest rates with the aim of curbing spending and limiting inflation, which reduces available liquidity in the economy.