The Federal Reserve's latest policy announcement represents a critical moment, as Wall Street waits to see how hard the central bank will go in its campaign to bring down stubbornly high inflation.
What's happening: The Fed is expected to raise its key interest rate by three-quarters of a percentage point on Wednesday to a range of 3% to 3.25%. But investors see some room for an even bigger hike.
They're putting an 18% probability on a dramatic full-point increase, a move that would shock markets and bolster the narrative that the Fed will do whatever it takes to get inflation under control.
Arguments could be made for both options. One on hand, inflation remains uncomfortably elevated, with consumer prices rising at an annual rate of 8.3% in August. That indicates borrowing costs may need to head higher to bring down demand and stave off more trouble ahead.
Yet the Fed also knows it takes a while for past rate hikes to feed through the system. And if its playbook is too tough, it could trigger a damaging recession and widespread economic pain, as well as reduce its options for future meetings.
"The faster the Fed hikes rates, the more likely they are to make a mistake," Gennadiy Goldberg, senior US rates strategist at TD Securities, told me.
A larger question also looms: Can the central bank retain confidence that it will successfully bring inflation to heel, a primary reason for its existence?
Faith in the Fed was rocked by Chair Jerome Powell's mistaken emphasis that inflation was "transitory." That incorrect assessment meant the Fed was delayed in addressing the problem and has to be more aggressive now.
Since then, some credibility has been restored. Bond market expectations for longer-term inflation have come down sharply in recent months, a sign these investors think the Fed is doing its job.
Take a look: Compare the yield on standard US Treasury bonds with those protected against inflation. The difference — known as the breakeven rate — tells you how much inflation investors foresee.
The five-year breakeven rate stands at 2.48%, down significantly from a high of 3.59% in March and not far off from the Fed's 2% target. The 10-year breakeven inflation rate sits at 2.4%.
"A lot of that has had to do with the Fed's very hawkish tone and their promise to keep hiking rates until inflation is back under control," Goldberg said.
mission accomplished."
"It's a very tenuous restoration of that confidence and of that faith in the Fed," Goldberg said. "The difficulty now is the Fed has to follow through. It's easy to promise to be hawkish or to be very aggressive in the pace of tightening policy, but you're really forced to deliver that tightening at the end of the day."
Dollar reaches new 20-year high as Putin escalates war
The US dollar climbed to a new two-decade high on Wednesday after Russia said it was mobilizing 300,000 military reserves in an escalation of the war in Ukraine.
The latest: In a televised national address Wednesday, President Vladimir Putin announced an immediate partial mobilization of Russian citizens and threatened to use "all the means at our disposal" to defend Russia "and our people." He also referenced the potential use of nuclear weapons.
The speech pushed the greenback up 0.4% against a basket of major currencies to its strongest level since 2002. Investors often seek safe haven in US dollar assets during times of geopolitical tension.
Oil prices also jumped. Brent crude futures, the global benchmark, gained more than 2%, rising to just below $93 per barrel.
The war has added to stress for investors, since it makes it harder to predict when inflation will ease and could push central banks to maintain an aggressive tack for longer.
It's also added to uncertainty around energy supplies. While gas reserves in Germany have been filled to 90% capacity, concerns remain.
Robert Habeck, Germany's minister for economic affairs, said that the country could "get through winter well" without Russian gas, but warned of "really empty" supply levels in the period thereafter.
And costs are rising. Germany nationalized its gas giant Uniper on Wednesday after an attempted bailout failed to prop up the utility.
On the radar: Kremlin-backed authorities in eastern and southern Ukraine have announced they will hold referendums on joining Russia this week. That could mark another pivotal point in the conflict.