The Federal Reserve "raised interest rates as expected," but the market is concerned about "how many more times will there be after this?"

The Federal Reserve has resumed rate hikes after two years, but the 25-basis point move itself is no longer the key focus—what the market is truly betting on is how far the path of subsequent tightening will extend.

The Federal Reserve announced on Wednesday that it would raise the benchmark interest rate by 25 basis points, with the decision approved unanimously, marking the first hike since July 2023. At the same time, 16 of the 19 officials expect another rate hike later this year, with the window pointing to the October or December meetings. After the announcement, market reactions exceeded expectations: the yield on the 2-year U.S. Treasury jumped to its highest level since July 2024, while the 10-year Treasury yield broke above the 5% mark.

On September 16, according to MarketWatch, signals released by Federal Reserve Chairman Kevin Warsh at the press conference were interpreted by the market as leaning toward skipping October and acting again in December. George Goncalves, Head of U.S. Macro Strategy at MUFG Securities Americas, noted that Warsh emphasized close monitoring of inflation trends, while only one month of data will be available before the October 27-28 meeting, which is insufficient to form a "trend" for judgment. Bloomberg Intelligence U.S. rates strategist Ira Jersey commented, "The market’s pricing seems even more aggressive than what the dot plot shows and the pace Warsh is currently willing to follow."

Unanimous Approval, "Credibility" Is the Key Word

The unanimous approval of this rate hike decision has been regarded 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 largely concerns rebuilding the Federal Reserve's credibility, “Measures of credibility only work when everyone is in agreement. A divided hike suggests the Fed is still debating the issue itself; a unanimous hike means the debate is over.”

Jersey gave a positive assessment of Warsh’s performance, calling it his best public speech since taking over the Federal Reserve in May this year.

"He was clear, stayed focused on the core message, avoided confusing the market, and his central message was simple: we have a 2% inflation target and the economy is doing quite well."

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

Following the pandemic, inflation soared and the Fed quickly tightened policy. In September 2024, the Fed shifted toward easing in an attempt to achieve a "soft landing"—maintaining a certain interest rate level while allowing inflation to fall and the economy to keep growing. However, many officials believed rate cuts went too far, especially the three cuts in 2025. The mainstream view among economists is that the Fed needs to fully reverse these three cuts before pausing to observe inflation trends.

Inflationary pressures have continued to build this year. In their statement, Fed officials said this rate hike "will help return to the FOMC’s 2% target in a timelier manner." Initially, officials tended to "look through" the inflation shock triggered by the Iran war, thinking its impact would not be lasting; but as high inflation persisted for more than five years, coupled with tariff pressures and geopolitical conflicts pushing prices up further this summer, more officials have lost patience.

Divergent Paths for 2027, Long-Term Outlook Remains Disputed

Although the near-term path of rate hikes is relatively clear, there are significant differences among officials regarding the longer-term direction of rates.

For 2027 rate expectations, 10 officials believe there will be no further action by then, but 8 anticipate one more 25-basis point hike. This division shows that there is no consensus within the Fed on whether inflation will fall as expected or whether the economy can withstand continued tightening.

Critics argue that this rate hike increases the risk of a “hard landing” for the economy. But Warsh stated at the press conference that the economy is currently strong enough to withstand higher rates. At the same time, Trump again called for rate cuts on social media, but did not directly criticize the Fed or Warsh.

After the rate hike decision was announced, market adjustments exceeded expectations, especially on the short end of the yield curve.

The 2-year U.S. Treasury yield rose to its highest level since July 2024, reflecting that traders' expectations for subsequent hikes have surpassed what is shown in the dot plot. The 10-year Treasury yield also rose, breaking above the key 5% level.

Analysts noted that the market’s pricing logic has moved ahead of the Fed’s official guidance—investors are betting on a tightening path more aggressive than what Warsh has publicly stated so far. This means that every inflation data release in the future will become a key node for the market to recalibrate expectations.