Markets are bracing for a rate hike this week. Here's what investors need to know.

• Markets see a rate hike on Wednesday as a near certainty.
• Bond yields have been rising for weeks, suggesting fixed-income investors see higher rates coming.
• Market pros say this week's policy meeting will be a test of Warsh's leadership.

It's Fed week, and markets are getting ready for central bankers to do something they haven't in a while: raise interest rates.

This week's meeting and the expectation that officials are going to hike borrowing costs marks a major about-face from what investors were forecasting at the start of this year, when rate cuts were still being priced in. According to the CME FedWatch Tool, markets see a 92% chance of a 25 basis point hike, up from about 70% prior to last week's consumer inflation report.

The meeting is also another big test for Kevin Warsh. The Fed chair will deliver his remarks following the 2 p.m. ET rate decision on Wednesday, and what he says could determine what markets think about his ability to steer the central bank through the overlapping macroeconomic challenges facing the US.

Here's what markets and investing pros are saying about the pivotal policy meeting.

Pricing in a hike

The consensus is for the Fed to deliver its first rate hike since July 2023. Not only that, but some forecasters see another coming before the year is out.

"We expect the Fed to deliver a 25bp rate hike at the September FOMC meeting," Deutsche Bank chief US economist Matthew Luzzetti wrote. "While forward guidance is unlikely, the median dot should show another rate increase this year, with several officials projecting more than that."

Michael Feroli, chief US economist at JPMorgan, expects to see the same. While he maintains that an October rate hike is unlikely, as it takes time to assess the broader economic impact, his team predicts a December rate increase.

"We expect that the Committee will increase the target range for the fed funds rate by 25bp to 3.75-4.0%," Feroli said. "At the end of the day the Chair's repeated stern warnings on inflation intolerance risk institutional credibility absent some action to back it up."

For consumers, higher rates could raise borrowing costs of mortgages, auto loans, and credit card debt. Savers would see higher returns for their high-yield savings accounts.

A hike could also be bad news for job seekers. Faced with higher borrowing costs, companies could tighten their belts, potentially slowing down hiring and promotion cycles.

While a single hike is unlikely to have a major impact on Americans' finances, households can expect to feel the effects of sustained higher rates over time.

Brace for market volatility

Rate hikes are often bearish for the stock market, but Jonathan Shugar, head of cross asset sales at Goldman Sachs, isn't so worried, arguing that the market is strong enough to withstand a modest impact of higher borrowing costs.

"The fact is that hiking 25 or 50 basis points doesn't change the need for the strongest balance sheet companies in the world to be investing heavily in CapEx, given how transformative a technology AI is going to be, and the consumer outside of the low end still is okay," he recently said on a podcast.

It's also the case that the market is already pricing in the hike, given the rising odds in recent days. Therefore, the more relevant part of the FOMC meeting will be Warsh's remarks during the press conference, which will be pored over by investors for clues about what's next.

Other Wall Street forecasters also have faith in the market's strength in the face of rate hikes. Ulrike Hoffmann-Burchardi, CIO of UBS Americas, noted that a hike would likely impact equities by increasing borrowing costs and weighing on corporate profits. She added, though, that despite any short-term volatility, her team's constructive outlook on the stock market remains unchanged.

Another test for Warsh

The market reaction to Warsh's public comments in his brief tenure as Fed chief has been mixed. His reticence to provide forward guidance has been an adjustment for investors after years of Jerome Powell's leadership, which emphasized transparency about what the Fed was thinking about the economy.

Warsh's Jackson Hole speech was seen as more helpful in laying out a policy framework, but investors have set the bar high for his communications this Wednesday.

For some Wall Street strategists, the meeting is a key opportunity for Warsh to build credibility before market conditions potentially worsen.

"With markets already pricing close to a 90% probability of a move, hiking now would give Warsh's tenure at the Fed an opportunity to build credibility and a clearer reaction function before the bond market forces his hand in a more disorderly manner," stated Morgan Stanley strategist Michael J. Wilson.

Jay Woods, chief market strategist at Freedom Capital Markets, noted that while economic data supports the case for a rate hike, he isn't certain that Warsh will actually do it.

"So far he has practiced patience, letting the market dictate the path of rates and hesitant to make any move," Woods stated. "The Fed appears to have the votes. The market has made its call. The data has made a compelling case. Now we find out whether Kevin Warsh agrees."

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