The Federal Reserve raised interest rates as expected; the market is now concerned about "how many more times will this happen?"

The Federal Reserve has restarted interest rate hikes after a two-year hiatus, but the 25-basis-point move itself is no longer the focus—what the market is really betting on is how far the subsequent tightening path will extend.

The Federal Reserve announced on Wednesday that it would raise its benchmark interest rate by 25 basis points , a decision that was unanimously approved, marking the first rate hike since July 2023. Meanwhile, 16 of the 19 officials projected another rate hike later this year, with the window pointing to an October or December meeting. Following the announcement, the market reaction exceeded expectations: the 2-year U.S. Treasury yield jumped to its highest level since July 2024, and the 10-year Treasury yield broke through the 5% mark.

On September 16, MarketWatch reported that signals from Federal Reserve Chairman Kevin Warsh at his press conference were interpreted by the market as a preference to skip October and intervene again in December. George Goncalves, head of U.S. macro strategy at MUFG Securities Americas, pointed out that Warsh emphasized closely monitoring inflation trends, but with only one month's worth of data before the October 27-28 meeting, it's insufficient to form a definitive "trend." Ira Jersey, U.S. interest rate strategist at Bloomberg Intelligence, stated, "The market seems to be pricing in something more aggressive than the dot plot suggests and the pace Warsh is currently willing to take."

It passed unanimously; "credibility" is the key word.

The unanimous passage of this interest rate hike decision is seen by many analysts as one of the most significant signals of this action.

According to reports, Vincent Ahn, president and portfolio manager of SLW Investments, stated that this decision is largely about rebuilding the Federal Reserve's credibility. " A move to restore credibility only works when everyone agrees. Divided rate hikes indicate that the Fed is still debating the issue itself; unanimous rate hikes mean the debate is over. "

Jersey gave Warsh a positive review, calling it his best public speech since he took over the Federal Reserve in May.

“He expressed himself clearly and always focused on the core message, without confusing the market. His core message was simple: we have a 2% inflation target and the economic growth is quite good.”

Analysts believe that this rate hike marks a significant shift in the direction of the Federal Reserve's monetary policy.

Following the COVID-19 pandemic, inflation soared, prompting the Federal Reserve to rapidly tighten policy. In September 2024, the Fed shifted to interest rate cuts in an attempt to achieve a "soft landing" for the economy—that is, maintaining a certain interest rate level while allowing inflation to gradually decline and the economy to continue growing. However, many officials believe the rate cuts were too large, especially the three rate cuts in 2025. The mainstream view in the economics community is that the Fed needs to completely reverse these three rate cuts before pausing its monitoring of inflation trends.

Inflationary pressures have continued to rise this year. Federal Reserve officials stated in a press release that this rate hike "will help to return to the FOMC's 2% target more promptly." Officials initially tended to "see through" the inflationary shock triggered by the Iran war, believing its effects would not be lasting; however, with high inflation persisting for over five years, coupled with tariff pressures and geopolitical conflicts further pushing up prices this summer, more and more officials have lost patience.

Path divergence in 2027, long-term prospects remain controversial

Despite a relatively clear path for interest rate hikes in the near term, officials are clearly divided on the longer-term direction of interest rates.

Regarding interest rate projections for 2027, 10 officials believe there will be no further action by then, while 8 officials still expect a 25-basis-point increase . This divergence indicates that there is no consensus within the Federal Reserve regarding whether inflation will fall as expected and whether the economy can withstand continued tightening.

Critics argue that this rate hike increases the risk of a "hard landing" for the economy. However, Warsh stated at the press conference that the current economy is strong enough to withstand higher interest rates. Meanwhile, Trump again called for lower interest rates on social media, but did not directly criticize the Federal Reserve or Warsh.

Following the interest rate hike decision, the market adjustment exceeded expectations, particularly in short-term interest rates.

The yield on the 2-year U.S. Treasury note rose to its highest level since July 2024 , reflecting that traders' expectations for the number of subsequent rate hikes have exceeded what the dot plot indicates. The yield on the 10-year Treasury note followed suit, breaking through the 5% mark.

Analysts point out that market pricing logic has already moved ahead of the Fed's official guidance—investors are betting on a more aggressive tightening path than Warsh has publicly stated. This means that every future release of inflation data will be a crucial juncture for the market to recalibrate its expectations.

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