Once the Federal Reserve begins its rate hike cycle, is a "three-times-a-time" rate hike a reasonable expectation?

The market has largely reached a consensus that the Federal Reserve will raise interest rates next week, but the real question that is tugging at investors' nerves is: how far will the rate hike cycle go, and in which market segments will the continued tightening monetary policy cause the greatest pressure?

On September 11, MarketWatch reported that Ian Lyngen, head of U.S. interest rate strategy at BMO Capital Markets, predicts that after the Federal Reserve raises interest rates by 25 basis points this month, it will raise rates once more at its October and December meetings, for a total of three rate hikes. This would push the target range for the federal funds rate back to 4.25% to 4.5% , effectively erasing the rate cuts planned for 2025 by former Fed Chairman Jerome Powell. Josh Hirt, senior U.S. economist at Vanguard, also stated that three rate hikes are a "fairly reasonable starting point" for assessing the Fed's path, but he also pointed out that the possible range for the number of rate hikes could be as wide as one to six.

Regarding market vulnerabilities, analysts have identified two potential risk exposures: the optimism behind the AI spending boom and the insurance industry's large holdings in private credit . Meanwhile, concerns about the widening US fiscal deficit are also intensifying; if the 10-year Treasury yield hits 5%, the market may face a new round of selling pressure.

"Adding three times in a row": Historical patterns and current expectations

Economists generally point out that the Federal Reserve has rarely been content with raising interest rates only once in its history.

According to reports, Derek Tang, a policy economist at Monetary Policy Analytics, said that once interest rate hikes begin, policy inertia often drives multiple consecutive actions.

Ian Lyngen's baseline forecast is for a 25 basis point rate hike in July, October, and December. If this path materializes, the federal funds rate will return to the 4.25% to 4.5% range—a level comparable to the high point before the rate cut at the end of 2024, meaning that the easing measures implemented over the past year will be completely reversed.

Josh Hirt offered a broader scenario framework for the market. He stated that a reasonable range for the number of rate hikes is one to six , with three being just a starting point, and the final path depending on the pace of inflation data evolution.

It is worth noting that there have been exceptions in history: In 1997, the Federal Reserve raised interest rates only once and did not take any further action for the next 18 months until it switched to cutting rates.

AI spending spree: one of the biggest pressures in a high-interest-rate environment

Derek Tang explicitly points out that the optimistic expectations upon which the AI spending cycle relies are one of the most vulnerable aspects to watch out for in the current environment of monetary tightening.

Charlie Ripley, senior portfolio manager at Allianz Investment Management, explained the transmission mechanism: AI "hyperscalers" are estimated to have annual capital expenditures of up to $1 trillion in the coming years , and these companies are highly reliant on debt financing. Rising long-term interest rates will directly increase borrowing costs and compress investment returns.

The report states that Ruchir Sharma, chairman of Rockefeller International, recently expressed similar concerns in an article published in the Financial Times: when the yield on U.S. government bonds rises to 5%, large technology companies will have to compete directly with the government in the debt market, and some companies may be squeezed out of financing channels as a result . There is a risk that the AI boom cycle will be prematurely ended by high borrowing costs.

Charlie Ripley also agrees that once the 10-year US Treasury yield reaches 5%, it could become a tipping point that triggers a market sell-off .

Private lending and insurance: an overlooked systemic threat

The second vulnerability that Derek Tang points out is the insurance industry's large-scale allocation of private credit.

The International Monetary Fund (IMF) has previously warned that insurance companies, which are partially or wholly owned by private equity firms, lack transparency and tend to allocate to riskier fixed-income assets. If sharp fluctuations in the interest rate environment lead to losses, the risk could spread from the insurance industry to the banking system , creating a systemic transmission across sectors.

Tang stated, "This is an area I believe market participants should pay more attention to."

The key difference between this round of interest rate hikes and historical crises

Despite the clear risks, Vanguard's Hirt believes that this potential rate hike cycle is fundamentally different from the rate hike cycles that triggered major financial crises in history, and should not be simply compared.

He pointed out that the collapse of Silicon Valley Bank in 2023 and the municipal bankruptcy of Orange County, California in 1994 both occurred against the backdrop of the Federal Reserve suddenly reversing market expectations —at that time, interest rates rose rapidly from low levels, catching the market off guard. The current situation is entirely different:

The Federal Reserve has already undergone a significant rate hike cycle between 2022 and 2024, and interest rates remain high overall, so the market is not unfamiliar with the policy direction . If there is another rate hike this time, it's more about finding an appropriate interest rate level to exert downward pressure on inflation than about disrupting the market narrative.

The report points out that this assessment provides a certain buffer for the market, but analysts generally emphasize that the structural vulnerabilities in the AI financing chain and the private lending sector still need to be continuously monitored.

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