The most important number from the Federal Reserve last week was not the new interest rate. It was twelve, the number of voting members who agreed with it.
On 16 September, the Federal Open Market Committee raised its benchmark rate by a quarter of a percentage point, to a range of 3.75 to 4 per cent. It was the first increase since July 2023, and a clear turn after an easing cycle that ended late last year. Nobody dissented. For a committee that was split nine to three in July, that is quite a change of mood over one summer.
What Actually Happened
The decision itself was widely expected by the end. What mattered was the tone around it. Chair Kevin Warsh said plainly at his press conference that inflation had been too high for too long and described the move as removing a dose of accommodation, which is central bank language for taking the foot off the accelerator rather than slamming on the brake.
The projections were more telling than the speech. Sixteen of the eighteen officials who submitted forecasts expect at least one more increase before the year is out. The committee’s own central forecast does not show inflation returning to its 2 per cent target until 2029, a timeline Warsh made a point of distancing himself from, signalling that he would like to get there faster. When the person chairing the meeting thinks the committee’s own forecast is too relaxed, you can draw your own conclusions about the direction of the next few decisions.
How Markets Took It
The reaction was more of a shrug than a shock. The Dow fell 1.2 per cent on the day, the S&P 500 slipped half a per cent, and the Nasdaq finished almost exactly where it started. Longer-dated Treasury yields actually edged lower, with the ten-year yield easing to just under 5 per cent.
That last detail sounds backwards, and it is worth a moment. When a central bank looks serious about inflation, bond investors often become more comfortable holding longer-term debt because inflation erodes the value of bonds issued. A hawkish Fed can be good news for the long end of the bond market even as it is bad news for anyone borrowing at the short end. Markets are rarely one story at a time.
Oil helped too. West Texas crude fell more than 3 per cent that day to around 102 dollars a barrel, and the energy backdrop is the quiet partner in this whole decision. Earlier this year, I wrote about how quickly a peace headline can change oil prices in The US Iran Deal: What Peace Means for Your Portfolio, and the same sensitivity is working in the other direction now.
Who Actually Pays
A rate rise is a transfer. Somebody pays more, and somebody receives more, and it helps to know which side of the table you are sitting on.
Borrowers on variable rates feel it first, whether that is a credit card, a business loan or a mortgage that tracks the market. Savers eventually see better returns on cash, although banks have a well-documented talent for passing rate rises to borrowers faster than to savers. Growth companies, whose value rests on profits expected many years from now, tend to be marked down when rates rise, because money in the future is worth less when money today earns more.
If you are in Britain, you are not insulated just because this is an American decision. A stronger dollar makes anything priced in dollars more expensive in pounds, including the oil feeding into our own petrol prices. Higher US yields also compete for global capital, which puts a quiet floor under what our own government has to pay to borrow.
How I Am Reading It
My own first reaction was impatience. I had half hoped the summer’s softer data would buy a pause, and I checked the decision the second it came out as if refreshing the page might change it. It did not.
What I am doing with that impatience is nothing dramatic. I am not rearranging anything on the strength of one meeting. What I am doing is paying closer attention to how much of my own position depends on borrowing staying cheap, because the committee has now told us, unanimously, that it does not intend to make that easy. The full text of the Chair’s remarks is on the Federal Reserve’s website if you want to read the tone for yourself rather than taking anyone’s summary for it, mine included.
A unanimous vote is the Fed’s way of saying it is not bluffing. The sensible response is to believe it.
The Jacqueline Brand — knowledge builds confidence, confidence builds wealth. This is editorial commentary for inspiration, not financial or professional advice. Always do your own research. The Collection
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