It is a night of intense anticipation worldwide, with investors holding their breath for the upcoming Federal Reserve decision. As midnight approaches on September 16, US equities are showing strength, led by a significant rally in AI-related technology shares. The Dow Jones Industrial Average is hovering near the flatline, while the Nasdaq Composite has climbed approximately 0.9%, and the S&P 500 is up around 0.4%. Meanwhile, the Nasdaq 100 index has advanced by roughly 1%, and the Philadelphia Semiconductor Index has surged nearly 2%. Adding to the optimistic tone in equities, crude oil prices have plummeted sharply, providing a further tailwind for the market.

In individual stock action, the semiconductor, optical communications, and memory chip sectors are experiencing explosive gains. This surge comes amid reports that SK Hynix may be exploring a partnership with Intel to produce semiconductors within the United States.

The primary focus for global markets, however, remains squarely on the Federal Reserve's interest rate decision slated for the early hours of tomorrow. Traders are widely betting that the Fed will opt to raise rates to counter inflationary pressures and uphold its policy credibility. Expectations are building that the central bank will deliver its first rate hike since 2023, as officials grow increasingly doubtful that inflation can cool sufficiently on its own without further policy action.

"This is Fed decision day, and the market broadly expects a 25-basis-point hike to preserve its reputation as an 'inflation fighter'," noted Ian Lyngen of BMO Capital Markets. The Federal Reserve is set to release its post-meeting statement at 2:00 AM Beijing time, accompanied by updated economic and interest rate projections. Fed Chair Kevin Warsh will hold a press conference thirty minutes later.

According to surveys, economists anticipate that Fed officials' forecasts for unemployment and inflation will remain largely unchanged. The rate projections will reveal how many officials expect additional rate increases later this year. Ahead of the Fed's announcement, fresh data showed that US retail sales grew broadly and posted their largest gain in five months, indicating that American consumers continue to spend despite higher gasoline prices.

Jim Baird of Plante Moran Financial Advisors believes the market is fully prepared for a rate hike at this juncture. Conversely, if the Fed chooses to hold rates steady, it would likely raise more questions about what the central bank is waiting for. Adam Turnquist of LPL Financial points to historical precedent, noting that resuming tightening after a prolonged pause does not necessarily derail an upward trend in equities. He highlighted that when the Fed has raised rates after a pause of at least six months, the S&P 500 has averaged a 5.5% gain over the following twelve months. Since 1972, there have been twelve such instances, with an average maximum drawdown of 9.4% over the subsequent year.

Economists at Morgan Stanley have revised their outlook for this year, shifting from expecting no rate action to projecting two hikes. This adjustment is partly based on public comments from Warsh, as well as considerations of further oil price increases, the inflationary effects of expanding artificial intelligence investments, and the broader market consensus shifting toward tightening. Morgan Stanley now anticipates one rate hike this week followed by another in December. "If they don't act, the Fed risks a credibility hit and a potential rise in longer-term risk premiums, similar to the market reaction seen after the July FOMC meeting," wrote Michael Gapen, chief US economist at Morgan Stanley.

Should the rate increase be approved, it would mark the Fed's first hike since July 2023. Since that time, the FOMC has implemented six rate cuts, totaling 175 basis points, or 1.75 percentage points. Investors will also be closely monitoring a host of other indicators as the Fed updates its Summary of Economic Projections. This document will include the latest forecasts for unemployment, inflation, and gross domestic product, alongside the so-called "dot plot," which illustrates each participating official's personal expectation for future interest rates. Notably, this update will mark the first time the dot plot includes projections for the year 2029.