NEW YORK CITY, New York: Investors are reassessing the outlook for U.S. interest rates after the Federal Reserve delivered its first hike since 2023, with the unanimous decision strengthening confidence in its approach to inflation while leaving uncertainty over how much further rates could rise.
The U.S. central bank raised rates by a quarter percentage point on September 16, lifting its benchmark rate to 3.75 percent-4.00 percent as it seeks to address persistently above-target inflation. Bond yields pulled back on September 17 after a prolonged rise that had partly reflected concerns over whether the Fed would act.
Some investors said higher rates could make rate-sensitive assets, including small-cap stocks, less attractive.
The meeting "does make them look independent...it adds trust to the market," said Matthew Miskin, co-chief investment strategist at Manulife John Hancock Investments. Yet the Fed "may have come off a little too hawkish in this meeting and we're just going to have to see how the economy can react in the next couple of months," he said.
Many investors had viewed the meeting as a test of independence for new Fed Chair Kevin Warsh, who was picked by President Donald Trump.
"I hope at least at a very high level, one takeaway that investors have is that economics is trumping politics at the Fed, at least for right now," said Marta Norton, chief investment strategist at retirement and wealth services provider Empower.
Markets entered 2026 pricing in rate cuts, but expectations changed after the late-February U.S.-Israeli war with Iran pushed up energy prices and inflation, shifting bets toward possible rate increases.
Investors also focused on the increase in the unanimous vote on September 16. At the Fed's previous meeting in July, the decision to leave rates unchanged was 9-to-3.
"A unanimous hike materially raises the probability of another move before year-end, and investors positioned for the easing cycle of early 2026 need to fully recalibrate," said David Krakauer, vice president of portfolio management at Mercer Advisors.
The S&P 500 ended September 16 down 0.45 percent, while the U.S. dollar rose sharply against a basket of currencies before paring some of those gains on September 17.
"This meeting landed as hawkish as it could have been -- the thoughts, the message, the unanimous decision itself," said Danny Zaid, portfolio manager at TwentyFour Asset Management.
The benchmark 10-year Treasury yield pulled back on September 17 after topping five percent following the decision and was last at 4.95 percent. The 30-year yield was at 5.30 percent.
Forecasts released on September 16 showed that Fed officials expect one more rate increase this year and that rates will remain steady in 2027.
"Much of the tightening risk is already priced in, but the bigger signal is whether the Fed believes this is enough or the beginning of more to come," said Karen Manna, fixed income strategist at Federated Hermes.
Fed funds futures on late September 16 indicated roughly even odds of another increase at the Fed's October meeting, which will take place just before the U.S. midterm elections that determine control of Congress. Further increases are priced in for 2027.
"One more hike is on the cards for this year, and the risk is we'll get more rather than less in 2027," said Dustin Reid, chief strategist at Mackenzie Investments in Toronto.
Inflation has remained above the Fed's annual two percent target for several years. The latest core Personal Consumption Expenditures Price Index, which Fed officials use as a guide to underlying inflation, was running at an annual rate of 3.3 percent.
Warsh's speech at the Fed's Jackson Hole conference late last month was viewed as hawkish and increased expectations of a rate hike. Those expectations strengthened after hotter-than-expected inflation data last week.
Warsh's reluctance to provide forward guidance about the path of interest rates has also contributed to uncertainty on Wall Street. His press conference following the Fed's July meeting left investors uncertain about his approach to inflation and was followed by an increase in long-dated Treasury yields.
"Warsh has given the bond market more clarity ... today that underlying trends in inflation are still too strong," said Collin Martin, head of fixed income research and strategy at Schwab Center for Financial Research.
Investors are now considering how to position their portfolios in a higher-rate environment.
"We don't want to overreact to one meeting," said Phil Blancato, chief market strategist at Osaic. Still, he said, "if this looks like the start of a hiking cycle, reducing duration and trimming some small-cap exposure could make sense."
