The Fed hiked as expected – but the rate path was the real news

A hike the market already expected

The Fed's first rate hike since July 2023 wasn't a shock. Ahead of the meeting, the futures market had priced in around a 90% probability of a 25-basis-point increase. Both Goldman Sachs and JPMorgan expected the same outcome, so the question wasn't primarily whether the Fed would hike, but how clearly the central bank would leave the door open to further increases.

The backdrop was an uncomfortable combination of higher energy prices, sticky underlying inflation, and an economy still able to withstand tight financial conditions. US consumer price growth was 3.4% in August, with prices up 0.4% from the prior month. Core inflation rose 0.3% month-on-month. At the same time, producer prices had risen 0.4%, and the oil price had added to concerns that cost pressures would keep spreading through the economy.

When the FOMC voted unanimously, 12-0, to raise rates, it therefore largely confirmed a scenario the market had already positioned for. An unchanged rate could actually have caused more unease, since it would have raised questions about the Fed's willingness to respond to inflation.

The rate path was lifted

The real news was in the updated projections. The median estimate among Fed officials now shows a federal funds rate of 4.1% at the end of both 2026 and 2027. That implies one more 25-basis-point hike from the current range, followed by a long stretch at a high rate. In June, the median projection for the end of 2026 stood at 3.8%, and for 2027 at 3.6%.

At the same time, the Fed raised its expected 2026 PCE inflation from 3.6% to 3.7% and core PCE from 3.3% to 3.4%. The growth forecast was lifted from 2.2% to 2.3%, while expected unemployment was revised down from 4.3% to 4.1%. The new economic projections thus describe an economy that is both stronger and more exposed to inflation than the Fed thought in June.

That's a hawkish signal. When growth holds up, investment stays robust, and the labor market sits near full employment, the central bank has less reason to tolerate above-target inflation. Higher rates aren't just a response to more expensive oil, but an attempt to keep the energy shock from feeding into wages, services, and longer-term inflation expectations.

Warsh offered no quick way back

Fed Chair Kevin Warsh stressed at the press conference that the underlying inflation trend hasn't shown any meaningful improvement over the summer. At the same time, he described the economy as having strengthened since the June meeting, with solid productivity and strong capital investment.

The message mattered: the Fed doesn't see the rate hike as an isolated emergency response to oil. The central bank believes demand is strong enough that inflation could become entrenched if monetary policy stays too loose. Warsh didn't commit to a specific decision for October, but did little to push back against the market's expectation of further tightening.

Selling first – then a relief rally

The market's first reaction was negative as the rate projections and Warsh's comments were digested. The US 2-year yield, which is especially sensitive to expected Fed policy, rose to 4.725%. The 10-year yield touched 5%, while the dollar strengthened. Higher required returns mean lower prices in Treasury futures and a higher discount rate for equities.

The Dow fell 1.21% on Wednesday, the S&P 500 0.44%, while the Nasdaq finished roughly unchanged. Tech therefore showed relative strength, but NQ futures remain exposed if long-term yields settle above 5%. ES futures, meanwhile, get support from strong economic activity but face headwinds from more expensive financing and pressure on valuations.

Thursday brought a tentative relief rally. US index futures rose as the oil price fell further and the 10-year yield eased. Nvidia and Amazon were up around two percent ahead of the open, while the probability of another October rate hike rose from 44% to 53%. The move shows the stock market isn't only reacting to the Fed: lower oil reduces inflation fears and can simultaneously improve the margin outlook for large parts of the economy.

Gold also recovered after being pressured by higher rates. For GC futures, the balance between inflation protection and real yields is decisive. Persistent price pressure and geopolitical risk support gold, but a stronger dollar and higher real returns pull the other way. CL futures are now the direct link between geopolitics and monetary policy: the longer oil stays elevated, the harder it becomes for the Fed to declare victory over inflation.

The key signal for the futures market

Wednesday's decision was therefore less about 25 basis points than about what comes next. The hike itself was priced in; a higher, flatter rate path wasn't fully priced in. The Fed is signaling that a robust economy leaves room to tighten further, and that inflation is once again the top priority.

For futures traders, that means every new inflation print, jobs report, and move in the oil price now carries extra weight. NQ and ES can still find support from growth and earnings, but need to withstand a higher required return. Treasury futures need signs of cooling inflation to find durable support, while gold balances between high real yields and the need for protection. The Fed delivered what the market expected — but not necessarily the rate peace investors had hoped for.

Sources

• Federal Reserve: Press release on the rate decision
• Federal Reserve: Summary of Economic Projections (SEP)