The Federal Reserve is widely expected to raise interest rates Wednesday, in a show of its determination to attack stubborn inflation.
Investors are betting that the central bank will raise its benchmark interest rate by a quarter percentage point to a range between 3.75% and 4%. That would be the first rate increase in more than three years, making it more costly to borrow money to buy a car, grow a business or carry a balance on a credit card.
The U.S. war with Iran has rekindled inflation, pushing oil and gasoline prices higher and driving the price of diesel fuel into record territory. Higher interest rates won't automatically bring lower prices at the pump, but they do signal the central bank's commitment to restoring price stability.
"The responsibility for 65 months of sustained, elevated inflation sits squarely with the central bank," Fed Chairman Kevin Warsh told an audience in Jackson Hole, Wyo., last month. "We must be confident that underlying inflation is moving to our objective, clearly and at sufficient speed. Otherwise, we have work to do."
Warsh's remarks were widely interpreted as a hawkish signal that the Fed would raise interest rates unless the economy experienced a marked slowdown in inflation.
"It is time to put up, or shut up," inflation forecaster Omair Sharif wrote in a research note. "You cannot give a speech like you did at Jackson Hole and not support a rate hike at the next meeting. You will either have to back up those words or end up as the boy who cried wolf."
Gas prices are a big driver of inflation
Annual inflation was clocked at 3.4% in August, according to the cost-of-living index released by the Labor Department last week. Prices rose a sharp four-tenths of a percent between July and August, with a surge in gasoline prices accounting for more than a third of the total monthly increase.
The price of diesel fuel has reached an all-time high, topping $6 per gallon. That has the potential to raise the cost of many other goods that have to be transported by truck or train.
Since April, prices have been climbing faster than average wages, so the typical worker's paycheck doesn't stretch as far as it used to.
At the conclusion of their meeting Wednesday, Fed policymakers will release their informal forecasts of where they think interest rates are going in the future. In June, the average member of the rate-setting committee was projecting just one quarter-point rate hike this year, followed by a rate cut in 2027.
Warsh, who took over as Fed chairman in May, did not offer a forecast at the June meeting. He has generally discouraged such forward guidance, fearing it could tie the Fed's hands and leave policymakers with less maneuvering room.
The bond market is already pushing long-term borrowing costs higher. The yield on 10-year Treasurys topped 5% this week. Bondholders are demanding higher returns in response to inflation and the strong demand for capital from both the federal government and private borrowers.
The yield on 10-year Treasurys helps set the rate for many types of borrowing, including mortgages and car loans.
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