Fed Approves First Rate Hike Since 2023

The Federal Reserve on Wednesday went in the direction Wall Street largely expected, green-lighting the first hike to its benchmark interest rate in three years and signaling that another might be on the way.

The central bank's Federal Open Market Committee (FOMC) voted unanimously to increase the federal funds rate by a quarter of a percentage point, to 3.75%-4.00% from 3.50%-3.75% previously. “Inflation remains elevated,” the FOMC wrote in a terse post-meeting statement. “Today's policy action will support a timelier return to the Committee’s 2 percent goal. The Committee will deliver price stability.”

The CME FedWatch Tool, which uses trading in federal-funds futures to determine Wall Street's expectations for future Federal Reserve actions, had indicated a greater-than-90% chance of a September hike prior to the September meeting. The market is now pricing in a 53% possibility of another quarter-point hike, to 4.00%-4.25%, by the December meeting, and a nearly 30% chance of a half-point hike, to 4.25%-4.50%.

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"The Fed has signaled it does not at this stage envisage an aggressive tightening cycle," says Kay Haigh, global head and CIO of Fixed Income and Liquidity Solutions at Goldman Sachs Asset Management. "Most FOMC members see a total of two hikes this year per the SEP, and it will likely skip October's meeting given its proximity to the midterm elections. One more hike this year in December is our base case, although this remains contingent on upcoming CPI reports and the path of energy prices."

The stock market's initial response was relatively muted given the highly telegraphed nature of the move. Consumers, meanwhile, can expect to pay more for debt but earn more in savings.

"The immediate impact will hit variable-rate banking products: consumers can expect to earn more on high-yield savings accounts, but will also pay more to carry revolving debt like credit cards," says Iñigo San Martin, CFA and Executive Director at fintech platform Raisin US. "Fixed-rate products with a set end date like CDs and mortgages have largely already adjusted upward following the yield curve."

This report will be updated.

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