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Markets don't always move in a straight line — sometimes they sit stubbornly in place for weeks, then flip almost overnight once enough evidence piles up. That's precisely what's happened heading into this week's Fed meeting, as Wall Street has finally warmed to the idea that the Federal Reserve is likely to raise its benchmark interest rate in its ongoing fight against a maddeningly persistent inflation problem.

The Odds Have Shifted Dramatically

Traders have now assigned a better than 90% probability that the Federal Open Market Committee will vote to raise the overnight funds rate by a quarter percentage point, pushing the target range to 3.75%-4%, according to the CME Group's FedWatch gauge of futures prices. Just a month ago, those odds sat at barely over 30% — a swing steep enough to suggest something significant shifted beneath the surface in a very short window.

What Changed the Market's Mind

Back then, the market had been banking on soft inflation readings and Fed Chairman Kevin Warsh's reluctance to commit the central bank to a hawkish policy path, hoping that combination would keep appetite for tighter monetary policy in check. That calculation didn't hold.

Jackson Hole Marked the Turning Point

Warsh's own remarks during the Fed's annual symposium in Jackson Hole, Wyoming, began turning the tide almost immediately. From there, a fresh round of discouraging inflation data, paired with a firming labor market, effectively sealed the deal. Adding further pressure, crude oil prices have surged back above $100 a barrel amid the ongoing Iran conflict — yet another variable pushing the central bank toward action rather than patience.

Wall Street Firms Fall in Line

Morgan Stanley's economists captured the broader shift in sentiment sweeping the Street. In a note issued Monday, the firm revised its forecast from expecting no hikes at all this year to now projecting two, citing Warsh's public statements, the recent climb in oil prices, inflationary pressure tied to artificial intelligence expansion, and a broader market pivot toward expecting rate increases. Morgan Stanley expects one hike this week, followed by a second in December.

The Cost of Standing Still

"Not doing so would risk loss of credibility and a potential rise in longer-term risk premia similar to the reaction after the July FOMC meeting," wrote Michael Gapen, chief U.S. economist for Morgan Stanley — framing inaction itself as a real financial risk, not merely a cautious default.

A Milestone Two Years in the Making

If approved, this hike would mark the first rate increase since July 2023 — a notable turning point given that, since that time, the FOMC has actually lowered rates six separate times, totaling 175 basis points, or 1.75 percentage points. In other words, the central bank would be reversing course after a lengthy stretch of easing, like a driver finally tapping the brakes after miles of coasting downhill.

More Than Just a Rate Decision

Beyond the headline rate move, investors will be watching a broader set of indicators Wednesday, as the committee updates its Summary of Economic Projections. That document includes revised outlooks for unemployment, inflation and gross domestic product, along with the closely watched "dot-plot" showing individual committee members' expectations for future interest rates. Notably, this update will mark the first time the dot-plot extends its projections all the way out to 2029.

What a Rate Hike Would Signal

According to Shawn DuBravac, chief economist at the Global Electronics Association, a decision to raise rates would reinforce the Fed's credibility at a moment when that credibility has arguably been tested. Wall Street broadly expects a 25 basis point increase, and DuBravac suggested that if it happens, the impact on inflation itself would likely be "modest," noting the move probably wouldn't slow AI-related infrastructure demand — a sector that's continued its aggressive expansion largely undeterred by monetary policy shifts.

Reading the Fed's Long-Term Intentions

DuBravac was careful to note that a single hike wouldn't necessarily signal a string of consecutive increases at every future meeting, but rather a meaningful shift in policy direction. "A hike would not necessarily mean increases at consecutive meetings, but it is a shift in policy direction," he said. "I would expect Chair Warsh to keep further hikes on the table while avoiding a commitment to a prolonged tightening cycle" — a measured approach that keeps options open without locking the Fed into an aggressive, extended campaign.

As markets brace for Wednesday's decision, this week's Fed meeting looks set to mark more than just a single rate adjustment — it's shaping up as the moment the central bank formally pivots direction after more than two years of moving the other way.