Wall Street investors and Washington observers closely watching the Federal Reserve's moves largely expect the central bank to raise interest rates at this week's meeting. However, a group of prominent economists have warned that this rate hike could be a policy mistake . In their view, the US economy's ability to withstand a significant slowdown is far less than the market generally anticipates. The Fed's core responsibility is to stabilize employment while controlling inflation. If policymakers announce a rate hike, their initial intention is to curb inflation. But these economists worry that a rate hike could cause a rapid contraction in economic activity, forcing companies to lay off workers and ultimately triggering a recession. In late August, Fed Chairman Kevin Warsh spoke at the Jackson Hole Economic Symposium, expressing concerns about inflation trends and stating that he would not hesitate to take action if inflation worsened further. Ten days ago, the market predicted only a 50% probability of a rate hike, but rising diesel prices, renewed tensions in the Middle East, and stronger-than-expected inflation data last Friday (September 11) led traders and economists to believe that Warsh would deliver on his hawkish stance and implement a rate hike. The Federal Reserve will announce its decision at 2:00 AM Beijing time on Thursday, and Warsh will hold a press conference at 2:30 AM.

Recession risks are emerging, and interest rate hikes could trigger a negative cycle.

Moody's Analytics chief economist Mark Zandi posted on social media platform X, saying, "The probability of a serious policy misstep by the Federal Reserve is already at an unsettlingly high level and continues to rise." Zandi, who has long advised prominent Democrats on economic matters, stated that slowing economic growth is unlikely to be achieved without layoffs, rising unemployment, and could easily trigger a self-reinforcing negative economic cycle. Northern Trust chief economist Carl Tannenbaum stated that the logic supporting interest rate hikes is not as clear-cut as the market and many commentators believe, and the Fed currently has no easy options. He said that despite the impact of geopolitical conflicts and tariffs, economic activity remains resilient, but the economy is not indestructible. Low-income families are depleting their savings to cope with rising living costs due to inflation. In an email to clients, he wrote that maintaining interest rates would buy more time to assess whether cracks have appeared in the underlying economic expansion.

Inflation data is contradictory, and aggressive interest rate hikes could easily lead to indecisiveness.

Steve Englander, Global Head of G10 FX Research at Standard Chartered Bank, believes that current inflation data signals are contradictory, making a rate hike premature. He states that the correct policy choice should be to maintain interest rates until these contradictory signals subside. If the Fed chooses to raise rates, only to reverse course and begin cutting rates a few months later, the market will perceive Warsh's control of monetary policy as highly unstable. Some economists believe the market has overpriced in a rate hike. Michael Strain, Director of Economic Policy Research at the American Enterprise Institute, says the market has misinterpreted the Fed's inclinations; the mainstream stance within the committee still supports keeping interest rates unchanged. He analyzes that if energy price increases and tariffs are excluded, core inflation will be close to 2.5%, not far from the Fed's 2% target. Michael Pearce, Chief US Economist at Oxford Economics, says that although the probability of a rate hike has increased significantly in recent weeks, the outcome of the September meeting remains uncertain. In a client research note, he said, "We maintain our original forecast that the Fed will choose to keep interest rates unchanged."

Conclusion

In summary, the Federal Reserve is currently at a policy crossroads. Market sentiment is overwhelmingly betting on interest rate hikes, but significant disagreements exist within academia and institutional circles. One side argues that a rebound in inflation necessitates suppressing prices through interest rate increases; the other side warns of underlying economic vulnerabilities, warning that hasty rate hikes could amplify the risk of recession. Furthermore, if the economy weakens rapidly afterward, forcing the Fed to cut rates, such policy vacillation would severely damage its credibility. The voting results of this FOMC meeting, the dot plot, and the wording of Warsh's press conference will determine the short-term direction of assets such as the dollar, Treasury bonds, and gold. The market needs to be wary of the possibility of a reversal in Fed policy expectations.