The Federal Reserve is expected to raise interest rates by 25 basis points at this week's policy meeting, with its latest "dot plot" likely signaling another hike later this year, UBS Securities said in a note e-mailed Monday.
The Federal Open Market Committee kicks off its two-day meeting on Tuesday, with a decision due Wednesday. The committee will also publish its Summary of Economic Projections document that includes FOMC members' anonymous expectations regarding monetary policy, dubbed the dot plot.
The Bureau of Labor Statistics' consumer and producer price reports last week failed to improve the inflation outlook, UBS said. Consumer inflation and producer prices hit three-month highs in August as energy costs rose, official data showed.
Markets are currently pricing in a 90% probability that the Fed will raise the benchmark lending rate by 25 basis points this week, according to the CME FedWatch tool. The remaining odds point to another central bank pause.
A hike on Wednesday would mark a major shift in policy following five consecutive FOMC decisions to keep rates steady. UBS economists including Jonathan Pingle are projecting a 10-2 vote in favor of policy tightening, with governors Christopher Waller and Michelle Bowman likely to vote for a hold.
"We expect the assumptions of appropriate policy to be split on the issue of whether one or two 0.25 (percentage point) rate hikes would be appropriate this year, but risks tilt toward two," Pingle wrote. "In the press conference, we do not expect Chairman (Kevin) Warsh to provide much future signal on the path of policy ahead, but if the FOMC actually raises rates that act alone should further empower his tough sounding hawkish rhetoric."
In his late-August Jackson Hole speech, Warsh said that the central bank's primary focus should be on prices, given that the US is doing well on the employment front. Earlier this month, Waller said he would support keeping interest rates steady if further signs of disinflation emerge, though he also seemed willing to tighten monetary policy if price pressures intensify.
Eighteen FOMC members will likely submit policy dots, with Warsh again not expected to submit his projections, according to UBS.
"We would not be surprised to see 10 participants assume two or more (25-basis-point) rate hikes would be appropriate this year," Pingle said. "Participants would be revising up their dots as they revise down their inflation projections, which is very rare, and we expect the FOMC members themselves remain somewhat divided on whether rate hiking needs to resume at this time."
The US is due to hold its midterm elections in November, and it could
"We think the proximity of the October meeting to the midterm elections makes that meeting an unlikely juncture for a rate hike," according to the UBS economists. "Indeed, one potentially compelling argument for raising rates at the September FOMC meeting might be to avoid the need to raise rates at the October meeting."
The need for more rate hikes will likely dissipate into 2027 as the base effects of the energy price shock lap, Pingle said.
