Wall Street investors and Washington-based Fed watchers largely expect the central bank to begin raising interest rates at this week's meeting, yet a group of prominent economists has issued a caution that such a move could very well turn into a policy blunder. In their view, the ability of the U.S. economy to withstand a sharp slowdown in growth is far more limited than the broader market assumes.

The Fed's core mandate is stabilizing employment while managing inflation. If policymakers announce a rate increase, the stated intention would be to suppress price pressures. But these economists worry that hiking would trigger a rapid contraction in economic activity, force corporate layoffs, and ultimately push the economy into a recession.

At the end of August, Fed Chair Kevin Warsh delivered remarks at the Jackson Hole economic symposium, expressing concerns about the inflation trajectory and signaling that he would not hesitate to act if price pressures deteriorated further. Ten days ago, market pricing for a rate hike stood at just 50%, but rising diesel costs, renewed tensions in the Middle East, and a hotter-than-expected inflation print last Friday (September 11) convinced traders and economists alike that Warsh would follow through on his hawkish tone and deliver a hike.

The Fed's decision is set for release at 2 a.m. Beijing time on Thursday, with Warsh holding a press conference at 2:30 a.m. Recession risks loom, and a hike could trigger a negative feedback loop. Mark Zandi, chief economist at Moody's Analytics, posted on social media platform X, saying: "The probability of a serious Fed policy mistake is at an uncomfortably high level and continues to rise." Zandi, who frequently advises prominent Democratic figures, noted that slowing economic growth without accompanying job losses and a rising unemployment rate is difficult, and it could easily set off a self-reinforcing negative economic spiral.

Carl Tannenbaum, chief economist at Northern Trust, argued that the logic supporting a rate hike is not as clear-cut as markets and many commentators believe, and the Fed currently has no easy options. He acknowledged that economic activity remains resilient despite geopolitical conflicts and tariff shocks, but the economy is not invincible. Low-income households are drawing down savings to cope with cost-of-living increases driven by inflation. In a client note, he wrote that holding rates steady would buy more time to assess whether cracks are forming in the foundation of the economic expansion.

Inflation data points are contradictory, and an aggressive hike risks leaving policymakers in a bind. Steve Englander, global head of G10 FX research at Standard Chartered, believes that the signals within current inflation data are mutually conflicting, making a rate hike at this stage premature. He stated that the correct policy choice would be to hold rates unchanged until these conflicting signals fade. If the Fed opts to hike and then is forced to reverse course with cuts just months later, the market would perceive Warsh's management of monetary policy as highly unstable.

Some economists think market pricing for a hike has already gone too far. Michael Strain, director of economic policy research at the American Enterprise Institute, said the market has misread the Fed's leanings, and the mainstream stance within the committee still supports keeping rates on hold. He analyzed that stripping out energy price increases and tariff effects, core inflation would be near 2.5%, not far from the Fed's 2% target.

Michael Pearce, chief U.S. economist at Oxford Economics, noted that while the likelihood of a hike has risen noticeably in recent weeks, the outcome of the September meeting still carries two possibilities. In a client research note, he wrote: "We maintain our forecast that the Fed will choose to hold rates unchanged."

In summary, the Fed now stands at a policy crossroads, with market sentiment overwhelmingly tilted toward betting on a hike, yet clear divisions have emerged among academics and within institutional circles. One camp argues that a rebound in inflation must be countered by raising rates to suppress prices; the other side warns that underlying economic fragility means an impulsive hike would amplify recession risks, and if the economy subsequently weakens rapidly, forcing the Fed to cut, policy swings would severely damage credibility. The outcome of this FOMC vote, the dot plot, and the language at Warsh's press conference will shape the short-term direction of the dollar, Treasuries, and gold, and markets need to remain alert to the possibility of a reversal in Fed policy expectations.