Economists' hesitation on a Wednesday hike evaporated after consumer price data, as well as strong readings of several producer price components that feed into the Personal Consumption Expenditures price index, the Fed's preferred inflation gauge already nearly twice its 2% target.
Many are now convinced core PCE inflation picked up in August.
Also, with crude oil futures trading well above $100 and diesel prices at a record high amid the unremitting Middle East war, inflation expectations are surging.
The 10-year Treasury yield is holding near the politically sensitive 5% threshold despite Treasury Secretary Scott Bessent's $6 billion buyback announcement.
"To some degree, Bessent's intervention at the long end of the curve also kind of contributed," BofA's Juneau said.
Many fear no hike this week could send bond yields sharply higher.
"The Fed's inflation-fighting credentials are on the line here. They have to back up their hawkish rhetoric with some real action at the upcoming meeting, or they do risk a much steeper Treasury yield curve," said Scott Anderson, chief U.S. economist at BMO Capital Markets.
The majority view among economists has swung through every possible policy outcome within a year for the first time since 2019, when the Fed cut rates three times.
"A quarter point may be the opening move, not the final one," said Diane Swonk, chief economist at KPMG, who was among the earliest in Reuters polls to forecast rate hikes.
"The only durable path to lower borrowing costs is to contain inflation."
Frustration over the rising cost of living has pushed President Donald Trump's approval ratings to their lowest level and has put Republican control of Congress at risk in November's midterm elections.
A rate hike could add to voter concerns about affordability, according to recent Reuters/Ipsos polls. Trump, who recently threatened wide-reaching trade restrictions unless the Fed cuts rates, said on Sunday no country should have lower interest rates than the U.S.
"Eventually Trump will start aiming his wrath at Warsh," said Jonathan Millar, senior U.S. economist at Barclays who expects two increases this year.
"We did think that was a big reason why the Fed wasn't doing anything in June and July. He (Warsh) was holding out, hoping conditions would fall into place so that he wouldn't have to hike."
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