The Fed raises rates by 25bps in September; HSBC expects one more 25bps hike in December

• Sep FOMC meeting decision: As expected, the Federal Reserve raised rates by 25bps, taking the federal funds target range to 3.75%–4.00%. The decision was unanimous and marked the first rate hike in three years.
• Statement highlights: Although uncertainty remains elevated owing, in part, to geopolitical developments, economic activity is expanding at a solid pace. Inflation remains elevated. Today's policy action will support a timelier return to the Committee's 2 percent goal. The Committee will deliver price stability.
• Dot plot: Of the 18 participants, 16 expect at least one additional hike; within that group, 4 think two further hikes may be needed. Two participants expect only one more hike followed by a pause. Fed Chair Kevin Warsh has not submitted an individual rate projection since taking office.
• Market reaction: US equities declined after the announcement (Dow -0.4%, S&P 500 below -1%, Nasdaq -0.01%). The US dollar strengthened, with the DXY moving above 100. Treasury yields rose, led by the front end: the 10-year yield moved up to around 5%, while the 2-year yield climbed by nearly 8bps to around 4.7%.

The Fed’s latest economic projections (SEP)

Compared with June, officials are more optimistic about the US economy and labour market, but they also expect inflation pressures to be more persistent.

Interest rates: The median projection for the fed funds rate this year is 4.1% (vs 3.8% in June), and the Fed expects this level to be maintained through 2027.

GDP growth: GDP growth this year is projected at 2.3%, up from 2.2% in the June forecast.

Inflation: Core PCE inflation forecast was revised up to 3.4%, up from 3.3% in the June forecast.

Chairman Warsh’s Remarks:

Chair Warsh declined to provide clear guidance on whether the Fed will begin a new rate-hike cycle. However, he stressed that the Fed’s objective remains clear – a timelier return of inflation to the 2 percent goal, while maintaining maximum employment.

He said inflation remains too high and has stayed elevated for too long—above the target for more than five years. Also, recent summer inflation data have not convinced him that underlying inflation has improved enough.

Economic activity is expanding at a solid pace. Domestic spending has been resilient, productivity growth is strong, and capital investment is robust. Job gains have kept pace with the workforce, and the unemployment rate has changed little.

He attributed the rise in long-dated US Treasury yields to stronger growth, higher corporate capex and fundraising—particularly by large technology firms and hyperscale cloud providers, which has intensified competition for capital—and rising geopolitical risks.

He noted that AI is important for both the demand and supply sides of the economy. The Fed will therefore establish a task force to study AI’s implications for future monetary policy, with a report expected before year-end.

• According to CME data, the market now expects over an 88% probability of at least one rate hike this year, up from around 51% at the end of August. Within this, the probability of one further hike is about 50%, while the probability of two further hikes is around 38%.
• HSBC views Warsh’s press conference tone as hawkish and inflation-focused. In HSBC’s view, the Fed continues to see inflation as persistently above the 2% target, warranting further policy action. HSBC expects one additional 25bp hike in December, and—given the economy’s resilience—expects the fed funds target range to remain at 4.00%–4.25% through 2027.

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