First American's Williamson breaks down what could tip the Fed toward a hike this week
As oil prices continue to surge, pulling Treasury yields along with it, the Federal Reserve will meet this week to decide whether it’s time to raise the Fed funds rate in an attempt to slow growing inflation.
While there have been meetings this year where the rumblings of a rate hike were present, the consensus generally believed the central bank would hold. However, those rumblings have gotten louder, and they’re showing up in how traders are pricing the meeting.
The odds of a 25-basis-point hike stood at 92.3% as of Monday afternoon, according to CME FedWatch, up from 59.4% a week earlier and 33.1% a month ago. Stronger-than-expected jobs data combined with persistently higher inflation numbers appear to be driving that shift.
CME FedWatch data also points well beyond this week's decision. As of this morning, traders are pricing in four separate 25-basis-point hikes over the next 12 months, one this week and one each in December, March and September.
Together, those moves would take the federal funds rate from its current range of 3.50% to 3.75% up to 4.50% to 4.75%.
With macroeconomic headwinds strengthening, the Fed will issue its latest rate decision on Wednesday. Experts believe it will be a close call between a hike and a hold.
Sam Williamson (pictured top), senior economist at First American, said the data released since the Fed's last meeting points in a fairly clear direction.
"The case for holding rates steady is getting harder to make," Williamson told Mortgage Professional America. "August's labor and inflation data suggest inflation is still running too hot, while job growth is still holding up and unemployment remains low. That mix gives policymakers room to lean harder against inflation, tipping the balance toward a rate hike this week and keeping further increases on the table. Still, the decision may be a close call and could draw dissent from less hawkish officials."
Weighing political pressure
Since Kevin Warsh took over as Fed chair, the White House has largely given the new head of the central bank some room to operate without overt public pressure.
That changed significantly in the run-up to this meeting. President Trump threatened that if the Fed doesn’t cut rates, the US would halt trade with top partners. On Sunday, the president reiterated again that the US should have the world’s lowest rates.
Williamson said that despite the increased political pressure, he doesn’t anticipate it swaying the central bank’s decision.
"Political pressure adds to the noise, but is unlikely to alter the course of monetary policy," he said. "The FOMC is a consensus-driven committee, and its credibility rests on keeping monetary policy tethered to the economic data. If markets perceive policy as politically driven, calls for lower rates could produce the exact opposite result by increasing inflation expectations and policy-risk premiums, pulling Treasury yields and mortgage rates along with them."
Williamson said the case for a hike stands on its own, but that doesn’t mean it’s what the Fed will do.
"A rate hike remains likely at this week's meeting, but it is not an open-and-shut case," he said. "The bond market has already done some of the Fed's work by pushing long-term yields higher and tightening financial conditions, reducing the need for immediate policy tightening. Even so, August's firmer core inflation reading raises the concern that this market-based tightening may not be enough to bring inflation under control, keeping a rate hike squarely on the table."
Finding a silver lining
With rates having moved closer to 7% in recent weeks, Williamson said he does not expect a dramatic shift in either direction through the balance of 2026.
"Mortgage rates are likely to spend the rest of 2026 zig-zagging in the mid-6% to low-7% range," he said. "The silver lining is that higher rates can delay life, but they cannot stop it. People will marry, have children, change jobs, and relocate. All of those life events can still prompt a move, even among the 'missing' first-time buyers who are still living with their parents."
Beyond the headline rate debate, Williamson said brokers should watch a handful of smaller trends that are easy to miss next to the bigger Middle East-driven energy story.
"Brokers should keep an eye on some of the quieter improvements taking place beneath the surface," he said. "The mortgage-rate spread has narrowed sharply from its post-pandemic highs, but remains above its pre-2019 average, leaving some room for further mortgage-rate relief, even if Treasury yields stay elevated.
“At the same time, inventory is rising, while income growth and softer house prices are helping prospective buyers in some parts of the country. Each improvement is modest on its own, but together they can help keep transactions moving in a difficult rate environment."
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