Fed Day: Will the Federal Reserve Hike Interest Rates?

Today is the day the market has been pricing in as the potential first rate hike by the Federal Reserve since July of 2023.

Geopolitical tensions have strained global energy markets, pushing up prices for diesel, gasoline, and other petroleum-based products, and headline inflation has stayed elevated for most of this year. Core inflation, which strips out volatile but critical items like food and energy, has moved closer to the Fed's 2% target, but the market's real concern right now is that lingering energy prices could pass through to the services side of the economy, and unlock stickier inflation in the coming months -- if the energy supply disruptions aren't resolved soon.

What the CME FedWatch Tool is Saying About a Fed Rate Hike

When the market closed Tuesday, the probability of a 25-basis-point rate hike sat at 92.5%, with only a 7.5% chance the Fed holds steady at today's meeting, according to the CME FedWatch tool. What also makes today's meeting unique is that the Fed will release an updated Summary of Economic Projections (SEP), which offers a glimpse into how the board views the current inflation backdrop, along with its outlook for the labor market and GDP growth. This SEP will almost certainly shift rate-hike probabilities for upcoming meetings; Fed Funds futures are pricing in two 25-basis-point hikes for the remainder of 2026.

What History Tells Us About Fed Rate Hikes

The first Fed rate hike within a cycle is typically met with equity volatility as institutional traders adjust portfolios and models to hedge against a tighter monetary policy environment. But every hiking cycle is different—different financial conditions, different geopolitical events, and a different pace of hikes.

The last rate hiking cycle began on March 17, 2022, shortly after Russia invaded Ukraine, which put severe strain on global energy logistics and supply. Europe had to scramble for new sources of oil and natural gas, global logistics lines were restructured, and the effects of COVID-19 stimulus were just beginning to reverberate throughout the U.S. economy. In some ways, today's geopolitical and energy backdrop resembles 2022, but there are significant differences to note.

Back in 2022, the Fed raised rates aggressively not only to tame inflation but also to attempt to correct an inverted yield curve—a condition in which short-dated Treasuries yielded more than longer-dated ones, during a time when there was aggressive fiscal spending during the pandemic. The Fed raised the Fed Funds rate by 425 basis points between March 17 and December 14, 2022, a rare and aggressive trajectory, then added another 100 basis points in 2023 before the rate topped out between 5.25% and 5.50%.

Why This Fed Rate Cycle is Different

This time is certainly different, at least for now. Yield markets have been preparing for the start of a Fed rate hike cycle for the last two weeks. The 10-year Treasury yield has moved almost 40 basis points over the last 20 days, breaching the 5.016% level — the highest level for the 10-year Treasury since 2007.

A small number of traders are seeking a pause from the Fed today, arguing that a rate hike would only impact the consumer negatively, with no beneficial upside from the symbolic move.

Taken together, today's meeting carries more weight than a typical 25 basis point move might suggest. The market has already priced in a hike with high conviction, but the real story will be in the details: the updated Summary of Economic Projections, the Fed's tone on lingering energy-driven inflation risk, and any signal on the pace of hikes still to come in 2026.

The comparison to the 2022 cycle is instructive but not identical — energy and geopolitical pressures rhyme with that period, yet the Fed enters this cycle without the added burden of unwinding an inverted yield curve, giving it more room to move deliberately rather than aggressively. With options markets pricing a modest, implied move and downside hedges still relatively inexpensive, traders appear positioned for an outcome that's more measured than shocking.

The real test will come not from today's decision itself, but from how the Fed frames the path forward.

This material is intended for informational purposes only and should not be considered a personalized recommendation or investment advice. Investors should review investment strategies for their own particular situations before making any decisions.

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