Counting the votes: Warsh faces a tough battle as the Fed girds for expected interest rate hike

Federal Reserve Chairman Kevin Warsh faces a tricky head count this week when he and his fellow policymakers decide on both the immediate and future path of interest rates.

While markets have honed in on a near-certain quarter percentage point hike in Wednesday's vote, it's not at all clear how broad will be the margin among the 12 Federal Open Market Committee voters.

Moreover, Warsh will have to decide how to message the move: Will this be the rare one-and-done on hikes, will there be more to come or will the chair maintain his cryptic posture in not trying to guide markets one way or the other?

"With the market priced this way, it would be shocking if he came in and did nothing," Bill Dudley, the former New York Fed president, said in a CNBC interview. "It would really damage his credibility because it would basically be all talk, no action."

Indeed, as of Monday afternoon, futures traders were pricing in a better than 92% probability of a rate increase this week, as well as a more than 75% chance that the FOMC would follow up in December with another move, according to the CME Group's FedWatch gauge. Fed funds, the benchmark overnight borrowing rate, currently stand at 3.50% to 3.75%.

The greater probabilities follow another run-up in fuel prices and inflation data last wee k that showed prices continued to climb in August. Both trends followed Warsh's comments a few weeks ago that the Fed would be forced into action unless there are more concrete signs that inflation is easing back to the central bank's 2% target.

For one thing, the Fed historically has looked through the type of trends that are fueling inflation now. Economists generally agree that much of this year's increase has come from tariffs and an energy supply shock from the Iran war, both of which have uncertain impacts on the long-range trajectory of inflation.

"We do not see a strong economic case for raising the funds rate," Goldman Sachs economist David Mericle said in a client note. "We think that all of the overshoot of 2% can be attributed to one-time factors whose impact is likely to fade."