Investors brace for possible rate hike at uncertain Fed meeting
On Friday, bets increased that the Fed will hike by a quarter percentage point after data showed consumer inflation picked up in August.
Fed Chair Kevin Warsh, center, talks to Bank of England Governor Andrew Bailey, right, and Bank of Canada Governor Tiff Macklem at the annual Jackson Hole Economic Policy Symposium on Aug 28, 2026, in Moran, Wyoming. (AP Photo/Amber Baesler)
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NEW YORK: Investors head into next week’s Federal Reserve meeting bracing for the central bank to raise interest rates, a move that could threaten a US stock market rally already showing some vulnerability to rising bond yields.
For years, inflation has persistently run above the Fed’s 2 percent annual target, and interest rate increases are the primary tool the central bank has historically deployed to try to tamp down prices.
After last month’s speech by new Fed Chair Kevin Warsh that was widely perceived as hawkish, bets have grown that the Fed will hike rates on Wednesday (Sep 16), at the end of its two-day meeting. Some investors remain dubious that the central bank, which has held rates steady in 2026, will take that step.
On Friday, bets increased that the Fed will hike by a quarter percentage point after data showed consumer inflation picked up in August. The core measure of the Consumer Price Index, which excludes the volatile food and energy components, rose by a hotter-than-expected 0.3 percent.
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“The weight is now on a hike in September,” said Alicia Levine, chief investment officer at BNY Wealth.
STOCKS NAVIGATING PERIOD OF UNCERTAINTY
Higher interest rates could undercut stock performance in several ways, including by raising borrowing costs for consumers and companies. Rate hikes that translate into higher Treasury yields could create more investment competition from bonds and pressure equity valuations.
The benchmark S&P 500 is up nearly 12 percent so far in 2026, lifted by robust corporate earnings growth boosted by massive spending on AI infrastructure.
The index has pulled back recently and was about 2 percent below its mid-August all-time high. A selloff in the bond market has pushed US Treasury yields to multiyear highs, with the benchmark 10-year yield closing in on a 5 percent level that could cause more trouble for stocks. Investors are also grappling with spiking tensions between the US and Iran that this week pushed oil prices over US$100 a barrel.
Stocks rose on Friday as oil prices fell.
“We’re at a period where there’s a lot of uncertainty,” said Cayla Seder, macro multi-asset strategist at State Street. “You have rising yields, and you have rising expectations of hikes … There is some overall nervousness that has to be priced into the market.”
MARKET ODDS LEAN TOWARD QUARTER-POINT HIKE
Following the CPI data, Fed funds futures suggested late on Friday an over 80 percent chance the central bank will raise its rate of 3.5 percent to 3.75 percent by a quarter-percentage point, according to LSEG data.
Those odds have shifted up and down in recent weeks, as traders reacted to economic data and comments from Fed officials. The latest employment report showed surprisingly strong monthly job gains, bolstering chances of a rate hike.
The latest reading of the core Personal Consumption Expenditures Price Index, which Fed officials use as a guidepost for inflation’s underlying run rate, came in last month at 3.3 percent on an annual basis.
“We know inflation is above target, we know that unemployment is low,” Seder said. “If the Fed does not hike and you see the market rally off of that, I think that could be an opportunity to fade a little bit. Because there’s still this looming environment where, maybe they don’t hike in September, but they could at a later date.”
WOULD ONE HIKE START A CYCLE?
If the Fed does hike on Wednesday, investors said they will look for signs about whether it is likely to be an isolated move or the start of a series.
“If it signals a cycle, like, hey, we still have work to do. I don’t think it’s going to be great for the market,” said BNY’s Levine.
Some investors said Wednesday’s Fed decision could be a test of Warsh’s inflation-fighting credibility, which came under scrutiny following his press conference at the last Fed meeting in July.
“The market remains concerned a bit with respect to Fed independence,” said JP Coviello, head of portfolio strategy at Citi Wealth.
BENCHMARK YIELDS KEEP PUSHING HIGHER
Rate hikes could filter through to bond yields, which have climbed steadily in recent weeks, pressuring equities. The 10-year Treasury yield rose to 4.99 percent early on Friday, its highest in nearly three years, and was at 4.97 percent late in the session.
Rate hikes and higher yields could have ripples below the market’s surface, investors said. Rate-sensitive areas could struggle more, such as shares of smaller companies that tend to rely more on debt financing.
Citi’s Coviello said the rise in yields has stemmed from “good reasons,” namely the pickup in economic growth expectations, while the strong earnings performance underscores a solid fundamental backdrop for stocks.
“Given the rate of change in earnings growth that we’re seeing at the corporate level, in our view, that outweighs the rise in real yields from an equity investment perspective,” he said.
Source: Reuters/fs
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