The Fed Just Raised Interest Rates | What It Means for Markets

If you want to understand where the global economy is heading over the next 12 months, or if you're a student preparing to walk into a global markets interview this week, this Fed decision we've just had is the single most important topic on your radar. Cuz last night, from when we're recording this, Kevin Walsh delivered his first interest rate move as Fed share. Despite relentless political pressure for lower rates, the FMC voted unanimously to hike by 25 basis points. That move reshapes a lot of things. Short-term Treasury yields jumped in initial reaction. Long- end inflation expectations have shifted and the yield curve is telling a very specific story about monetary policy independence and supply side inflation. So, in this episode of the Market Maker Podcast, we're skipping the noise and breaking down the actual mechanics of this. What drove that unanimous vote, how trading desks reacted across fixed income FX and the exact frameworks that you need. to hopefully intelligently go about answering that inevitable question that you're going to get about what is happening in markets and what is that going to look like in future. So peers, how you doing and let's get into this. Hello. Yeah. Well, first hike for 3 years um which is the kind of you know I'm just looking back on the chart. It was actually July 2026 uh sorry 26th of July 2023 was the last hike. Um that got rates up to 5.5%. Which was maybe I should say currently the high in this hiking cycle. Um but they were flat for five at 5.5 then for you know about a year. Then we had cuts remember. So, we had three cuts back end of 2024. Pause. Three cuts back end of 2025. Pause. Now it's gone back up. And um yeah, I think the big the big thing I mean obviously Walsh, Kevin Walsh, I don't think we should be saying new Fed chair anymore. He is the Fed chair. Um and has been I think this was his third meeting. Um I think yeah it's um it's just it's just interesting as we've got to know him you know through these events these these meetings these statements these press conferences I think actually this meeting probably for the first time markets are like all right okay we we we we get we get what's going on now and it's so we'll talk about market reaction here I think it's actually quite interesting But yeah, I mean the the kind of big throwaway like the big headline was uh you know from Walsh in the press conference. Remember, just for those who don't know, the sequence of of events here is that well, hang on. Every 6 weeks, the FOMC, Federal Open Market Committee um have a meeting and uh it's on a Wednesday, the culmination of that meeting, and I'm talking London timings now. At 700 p.m. on that Wednesday, they release their statement and and that's where the news breaks if they're changing policy or not. Obviously, they did. They hiked rates by 25 basis points last night. Then there's a 30 minute gap. Then we have a press conference where Walsh uh the the chair steps up and delivers the statement, then gets grilled by the press. And this is where Walsh has been trying to wean us off, you know, information flow coming from that Fed chair seat that we've been used to for decades. Walsh is trying to been saying, look, we're going to communicate less. And so we've been trying to get used to that. But what he did say, the big line, inflation is too high and has been and has been for too long was the quote. So So the idea here was that he spoke not that long ago at Jackson Hole and was remarkably hawkish at the time. So was this really a pretty clear market setup? You had that comment a few weeks back. You had some strong economic data, you know, market pricing. I was looking at poly market going in. It was like 90% that they were going to hike. >> Uh very much aligned then to market expectations in that regard. So was this really >> is Kevin is Kev going to come good here or have we got a major liability on our hands? And this is actually sounds ridiculous but this is almost like the absolute cornerstone of what markets needed for reassurance which is that someone's credible. So, was that really what was on the line here? And as you said that that comment, he's basically stuck to the script, >> but was there a tail risk here of a banana skin because of pressure from your man Donald and the rest? >> I think what's what's been I think the major concern out there in the marketplace has been inflation going back up. And we took go and listen to our episode last week, I think it was, which was all about that, right? And obviously partially this is due to energy prices ramping off the back of the you know supply risk as a result of the uh US Iran conflict right but so inflation's going up right but what markets were worried about was that the Fed wasn't going to do anything about it and they were just what just weren't quite sure what are the Fed going to do here and almost like what happens if they don't act and and what happens if inflation does continue to creep higher and that was the concern. and it was like inflation is going to get out of control and and that's why I think things like the long end of the yield curve. So, so when you're looking at US um yields on, let's say the 30-year government bond, then you know, you've seen it going out to levels that we haven't seen for decades, you know, it's up well in excess of 5%, right? and and so the cost of borrowing therefore I talked about it last week the government are going to have to roll over $10 trillion worth of debt in the next 12 months and interest rates are incredibly high and it's going to be super expensive and so the interest rates were high because of that worry that inflation's out of control will it's not out of control will inflation become out of control are the Fed going to do anything about it no one's quite sure so I think the uncertainty has been not removed but certainly significantly reduced as a result of what happened last night and I think ultimately for markets that will be interpreted positively and yet the other terminology that central bankers like to use is uh you mentioned there like tightening policy but then the accommodation of policy >> the other one was removing a dose of accommodation so what what's that u kind deconstructed. What's he trying to say? >> Yeah. Well, it's it's interesting because I mean, look, he's so obviously he said inflation is too high and has been for too long. And I mean, you that's undeniable. You go and look at the inflation charts. I mean, if you just look at CPI, inflation has been well in excess of their 2% target for well over 5 years now, right? um it almost got back to target at 2% you know sort of end of last year but now it's just kicked back higher because of the well the straits for whole moves situation as I've already mentioned right um but the Fed do look at other we'll talk about core PCE in a minute but look all inflation numbers are kind of moving back higher but when you look at the underlying economy whilst that all sounds alarming go and check out the stock market still on its high you go and check uh economic data coming out of the US really strong. Did you see the retail sales figures yesterday? You know, beat expectations, you know, really really solid, really strong retail sales numbers, which is a great measure of the do we use the word resilience, you know, of of the consumer in America. Obviously, we talked about US corporate earnings that have been just mega, right? So, the economy is really strong. So what Walsh is saying here with that language, I'm removing a dose of accommodation, he he's trying to say, look, I'm not I'm not tightening policy here to try and, you know, tip the economy into recession. He's saying, look, interest rates are too low. this is leading to really hot economic expansion which feeds into sustained um inflation upside pressures and he's saying look we're if we stay where we are this is stimulus so I'm going to remove a little bit of that stimulus by just flipping up the interest rates a notch so in this meeting they put out their summary of economic projections their forecasts and how they their research es are looking at the future and one of the things there was an extended inflation timeline. So somewhat then as an extension of what you're saying the Fed pushing back its forecast for returning its 2% inflation target >> from 2028 to 2029. Does that come as very little surprise then given what you've just described? It's just in keeping with the the general phrasing. >> Yeah, exactly. I don't think I don't think there's too much to read into that given what's Yeah, given the language that's been used recently. Um, you know, inflation's been above target for 5 years. And look, it's it's going back up. So, you know, they're basically saying, "Yeah, we're not going to be able to tackle and wrestle this beast back to target until maybe 2029." I think I think with that there's maybe room for then positive surprise where maybe they get it back down there before 2029 and then they can self-grade with a with an A star. Um but I don't think that's that's too influential. 28 29 same same. So maybe let's let's break down then some of the macro drivers and there's kind of I guess three elements to this that if I could pick your brains on. one is this inflation. I mean it feels like uh if you think of like the the the balance of economic uh inputs as to what's influencing these decisions, it's wholeheartedly focused on you know a singular narrative of inflation. So supply side and energy shocks and how we're the market is looking at that, how the Fed look at it and therefore as investors should be looking at it. Then this idea of Fed independence because that had been somewhat questioned up until this point and then also some of the political frictions that are obviously ongoing with the the political event happening with the midterms only a few weeks away. Yeah, your man Donald's not happy. But um look, supply side energy shocks like let's take that first one. We've spoken about this quite a bit, but you know, if you want an argument as to why if you're in the camp that the Fed should not hike, you know, why are they hiking? You know, there's a good there is an argument for that and that is that well, why is inflation going up? What's driving that? And will a Fed rate hike have any impact on that that factor? So the factor what you could say the big the big thing is the supply side you know energy supply risk as a result of the conflict in the straits of four moves right so we know the price of oil um actually it has come off a little bit you know last week let me just I've lost oh here's my chart on break crew cuz um la last you know obviously the last few weeks we've seen break crew ramp back higher and we broke a hundred bucks back on the 10th of September And actually since then, so for the last seven days, it's just calmed down a bit. We we are still above $100. We're trading well just under $105 actually, which is the lowest we've been for a few days. Uh having flirted with $110, right? So it's kind of settled down a little bit, but look, obviously it's above $100, and this is feeding through to inflation. Um obviously energy prices directly. Um and so but the argument is well if the Fed hikes that doesn't that's not going to end the war. So why should they hike? Because the the source of that that's driving prices up has got nothing to do with the Fed. You know it's obviously more of a foreign policy situation. So you could say if it's just a supply shock the Fed shouldn't make a move. Okay. But as we've been discussing, um, how long is is how long does oil stay high? I mean, we were talking like this conflict started back in February, right? So, it then feeds into other stuff. Um, and so, you know, that I think now we're definitely of the opinion and certainly after last night where they've hiked that it is feeding through into other stuff. And actually just we'll do a quick aside on the Fed's key measure of inflation isn't CPI um which is often like the headline inflation reading. It's actually something called PCE which is actually tracking at 3.7% right and going up. So 3.7 that's no obviously nowhere near 2% their target PCE then just just quickly for people's awareness that's the personal consumption expenditures measurement this is me it's still inflation with an inflation basket where you got lots of items in the basket and you measure the cost of those items each month and you see right has that gone up or down versus last month or versus the same month last year and you track essentially the cost of living. But this one focuses a bit more on everything households actually spend money on. So food, petrol, rent, healthare, clothes, you know, all all the usual stuff that CPI CPI has as well. But the key differences, the kind of two key differences. Um firstly, the PCE reading update. They update the basket as people change behavior. It's a bit more reactive. Simple example, if beef gets really expensive, will shoppers then, well, all right, I'll buy chicken instead because it's cheaper. So, the CPI basket doesn't account for that. It's just fixed. They hardly ever change it. PCE will go, okay, I see what's going on here. Let's kind of dampen down our beef element in the basket and we'll we'll ramp up the chicken element. So, it tries to be a bit more reactive to nearer term trends, which so that sounds good, right? That's why they're fed use it. It's a bit more sort of real on the ground. what's happening. The other one is on health care which in the US is obviously a really big cost. Um so PCE counts spending made on your behalf. So health care is a really big part. So PC includes what employers and Medicare pay for your treatment because obviously it's all health insurance oriented in the US. So you're not paying directly but what's your company paying or what's the insurer paying? Um and so actually that gets fed into PC as well. They're the two key differences, right? So that that that PCE figure is what the Fed monitor and WSH confirmed that last night by saying that, you know, that's our our key measure. So, so there's that. We So we are of the opinion that PCE look, it's got too high and and add in the tariffs from, you know, Trump's sort of uh campaign. Tariffs seem so long ago now, don't they? But anyway, it is still a thing and that's added to inflation, right? So look, they're they're hiking because they feel like it's a bit more broad-based. So I think the more important thing is this Fed independence, Fed independence reestablished, let's call it. Um, and I think that one really interesting measure of that is is obviously WS has hiked here. Remember Worsh went through a rigorous interview process a few months back. Trump having spent the last two years, you know, like not being shy about criticizing Pal for hiking and we should be cutting. We should be cutting. And then he did this interview process and the whole thing was, oh, he's going to he's going to put someone in a puppet um chair who's going to cut rates for him. That was the kind of risk, right? Walsh got the job. He's in the seat. The midterms are literally in like 6 weeks and he's hiked. I mean, there couldn't be a more powerful message to the market to say, "Hey, you lot, I don't give a about Trump. I don't care. He's got an election in 6 weeks. I think inflation's too high. I'm hiking." There could not be a more clear message to say, "I'm not politically influenced." So, I think the timing of this is really powerful. >> Did you see the Trump Truth Social? Did you see the the immediate tongue lashing that the president put out? I'll flash it on the screen if you can see it, but if you can't, I'll I'll read it out. He said >> interest rates in the United States should be 1% or less >> because we are the best credit in the world, capitals by far. >> Yeah. What what I'm most surprised about that is the lack of capital letters. He he only he only used by far at the end was his only capitals. Um >> interestingly though that uh Trump later so that was his initial like emotive response. I mean >> the crazy world we live in when the most, you know, powerful person on the planet has this emotive reaction response criticizing Walsh and then comes off the boil and then later Trump said he had confidence in Walsh with whom he has a long-standing personal relationship and deflected blame then to the Fed board. Yeah, >> a little swipe there because of course that includes the former chair J Pal who whom the president has previously obviously called a for noting rates. So yeah, there's a really classic meme going around Twitter or X last night. Uh again, I'll I'll show it on the screen for a moment if you can see it, but uh yeah, it's a it's a it's a beauty. But yeah, Trump definitely mourning uh for for what was Pal. Now Walsh is uh you know him the bird >> cuz Pal's still on the voting committee remember he he's so and he's there till 2028. So here here's Trump basically yeah saying look I don't blame you. He went I mean talk about trying to undermine the whole thing like I think look I think the market's better than this right and they understand that Walsh's actions have definitely reassured us and independence is there but he was talking about um I had a quote which I can't find now so I'm going to paraphrase it but he was basically saying yeah I had a word with Kevin you know just before the meeting and I said look you might as well vote with the committee. You might as well go with the committee. Look, they're all going to vote for a hike. You might as well vote for a hike as well. There's no point you kind of standing out like a sore thumb. You know, you might as well vote with them. Um why would he say that? It's just like ridiculous. Um but he's blaming Pal still who's still on that committee and and driving driving a hike. But I I think look part that I think independence is definite were worth definitely reassured. One measure another measure of that is actually a guy called Christopher Waller. So he's also on the committee. Um he was going for the Fed job um that he was part of the interview process a few months back. Um, the reason why I pick him out is cuz he's normally dovish. And whether that was now that I think it through a bit more, maybe that was just he was just trying to get the job. So, he was being doubbish cuz that's what Trump likes and maybe therefore he'll put me in the seat. Anyway, didn't get the job. But on the 3rd of September, so like less than two weeks ago, Waller did say that he's inclined to keep interest rates on hold, highlighting divisions, you know, among the US central bank rate setters. So he said, I'm I'm inclined to keep rates on hold. And yet less than 2 weeks later, Walsh has persuaded him, you would imagine, right, to get on the bandwagon and let's be unanimous here together so that we can send a real clear signal to the market that we're not messing about. We're in control. We see inflation. We are acting as a unit. You know, there's no arguments here and we're prepared to do it just before the midterms because we think it's the right policy change to make. And so I think independence check. We're now not uncertain about that. >> Look, before we we talk about what does this mean then looking forward, maybe just a quick word on how the market reacted to everything you've just described. So >> I guess there's four kind of ways to look at this. You mentioned earlier about the yield curve. So in the 2-year Treasury yields, they did rise. So repricing for a hawkish Fed expecting higher rates for longer that very much keeping with the language that the Fed described and with the movement in the dot plot the 30-year Treasury yield actually fell a touch so long-term inflation expectations easing mainly as you just said credibility bond holders trusting the Fed to curb inflation or at least recapturing some of that faith. dollar capital inflows toward higher yields, credible central bank key. So the US dollar did strengthen. So you saw you know euro dollar cable decline on the back initial move. US equities they initially fell. I mean the theory would be I guess that tighter financial conditions, higher borrowing costs weigh on corporate valuations. uh looking at the futures ahead of the market open just the next day and yeah at the time we're recording this the S&P 500 futures up almost a percent and the NASDAQ up the same margin. So all in all it feels like a pretty successful event for Walsh here. >> Yeah, I think that's right. And I think I mean you could say well stock markets only ever go up so why should you be surprised? That's kind of what it feels like in 2026. But yeah, the fact that yeah, these futures indices are are trading above, you know, we got high new highs for the week on on the NASDAQ for example, right? So, um, having sold off last night initially, um, now we're new highs for the week. So I think that kind of tells you the whole story that people have digested all of this in such a way that we're no longer uncertain about independ the independence of the Fed and that's really really important. I think you might have stocks starting to think about well maybe this we can see a turning of the corner here for longend yields. They've been elevated mainly because of the concern about inflation and the Fed's not going to do anything about it. That's now put to bed. So, you could start to see longterm yields trend lower, which is ultimately good news for everything. Um, obviously the government can refinance cheaper, but also it means the differential, right? You're getting less return on your long-end bonds now. So equities relatively speaking look more attractive if that's your view right. So are we going to get now a trend back to the downside for long end yields? I think this initial reaction in markets this morning is saying yeah we may well do or certainly the chances of that gone up. So I think really that's what's pushing things higher. But the 2-year yield stays you know that that's gone up which makes sense. It's the shorter ends of the curve that's more influenced by the interest rate level and where we think interest rates are going to be in the future. So this 2-year yield stepped higher and has remained higher and actually is is at its highest rate now since uh June 2024. Okay, so that makes sense. Um so you got a kind of flattening of the yield curve here. >> Um and then the dollar. Yeah, it's interesting. I mean that given what I've just said, it makes sense that also the dollar strengthens um which it has and actually it's gone back above 100 on the dollar index um last night. So it's the first time we've been above 100 since end of July. Um but like more broadly I mean the dollar's it's still kind of well within its range of the last you know 18 months. So you know you haven't got any major breakouts there but it has strengthened and gone back above 100. >> All right. Well look for forward looking one thing that does always come into focus is the dot plot. I mean question marks on how relevant the dot plot is these days as now we've gone the third meeting for Walsh mirroring his inaugural rate decision uh back in June. And the September dot plot once again reflected projections from just 18 of the FMC participants covering the remainder of 2026 27. Uh of that the updated dot plot showed a median of 4.1% by year end of 2026. 16 of 18 officials project at least one more rate increase this year. Would you say that's fair pricing for information we have to hand at this present point in time? >> Yeah. So what so what do you hang on? What do you say? So one more hike is kind of where Yeah, cuz we went from well, let's just say 3.75 to four and now the dot plots are saying that we'll get one more hike to 4.25 before end. >> Two meetings left. One is just before the midterms >> and then the next one is on the 9th of December or the last one. Only two more. Yeah, I I think it's fair to say pause in October, uh, end of October and then the December meeting, maybe that's live and maybe we should expect one more at at the current time. Obviously, it depends what happens between now and then and where that PCE inflation situation goes. Does does something does is there a deescalation again in the Middle East and you know obviously that this is a moving target, right? But right now I would say that is fair. Um, maybe one more hype before your own. You just used the word live. So that's not your wording, right? That's actually market terminology of which the central bank itself has used in the past. Live meaning that basically uh any decision could be made depending on incoming information between now and then. >> Yeah. >> So saying live, can you give me an example of like by saying uh live when when has that been a recent thing? Cuz it hasn't wasn't that long ago. I remember when they were saying this. I guess the the example would be when there's a highly interchangeable conditions and largely outside of the Fed's control like a supply shock like the US Iran conflict. You have to remain live i.e. have agility to move >> in order to then compensate for you can't you have no bearing on the outcome of that Middle Eastern conflict. >> Yeah. And you've got to be reactive to, you know, the the the underlying data. And the underlying data is influenced by situations that are live. You know, they are very much changing day by day, week by week. It just means it's impossible to predict, you know, three months ahead because there's so much going on, right? And so it's just saying whilst today, right now it looks like a hike in December would be a sensible option, but it remains a live scenario. So conditions on the ground could change and and if they do then we will change and we won't hike. So yeah. Is there anything to learn if we look back? I saw a chart that was showing the history of Fed hiking cycles going back to >> the mid9s. So that would include you know your green span the switch over to Bernanki it would include Yellen as well as POW obviously different scenarios of which the hiking cycle was was executed but I think behaviorally is there anything there that you would look at and go >> okay what's happening now and can I use that as a reference point historically as to how the market might behave going forward. Yeah. Well, I mean, one thing looking at the chart that really stands out is just how aggressive the Jerome Pal hiking cycle was. 2022 through 2023. We talk about how steep the hiking cycle is. It's just the rate at which interest rates are going up. And actually, it was basically the steepest hiking cycle, you know, in modern times. Um, and obviously he's now flattened off, of course, cuz as we've said, last night's hike was the first one for 3 years. But hugely steep hiking cycle. What does that mean? Well, it means it should mean that it has a bigger impact on the underlying economic conditions. If the rate of change is faster, you should expect the impact to be greater. But then you go and have a look at the impact and what's changed. Well, inflation is still above 2% and stock markets are alltime highs. So actually that's the shocking thing. It's the steepest hiking cycle ever and yet seemingly hasn't had an impact. So you I mean so how do you even begin to explain that? Well, I think the one key difference about the hiking cycle compared to the others, it started from a much lower base started from zero, right? You go and look at all that other all those other ones, Greenspan in the '90s, Greenspan Banani in the naughties, you know, they they weren't coming off off zero. They were starting I I'd have to go back and have a look, but like the starting point might have been 2%, let's say. So I think that's probably the the biggest point to make. But then, you know, whilst yes, we've got a lot of volatility in this world, we're we're at the beginning of this massive secular long-term AI shift. And so that's it's definitely contributing to a resilient underlying economy in my opinion. And so we're yeah, you got these kind of really it's an interesting crossroads. And look, at the moment that mega steep hiking cycle didn't do the job. And that's what that's what Walsh said last night. Inflation's been above target for too long. Yeah, we hiked big time, but it's still above target. So whilst we've been on pause for three years, we're back. We're back and we're we're moving rates higher um because we need to get this thing under control. >> All right. Well, look to to wrap up one of the comments that we had from recent episode we did which was more banking focused which was about getting people prepared with some good uh evidence to support questions or responses to questions about what's been happening in the M&A world. To wrap up this then your 60-second kind of cheat sheet of what we've discussed which I thought might be helpful. So the action being unanimous 12n vote the FMC delivered a 25 basis point hike again the federal funds rate now 3 and 3/4 to 4% it's the first increase since July of 2023 the macro driver supply driven battle PCE running hot you said 3.7% amid the Middle East oil shocks there's some aggressive tariffs being rolled over officials forced to extend their 2% inflation target timeline out by a year out to 2029. The key one, I think that's the main probably talking point. Fend independence. >> Share Kevin Walsh asserted institutional credibility pushing back against Trump the administration's demands for 1% borrowing costs again 1%. We're currently near 4% at the moment. So he framed that move Walsh as removing a dose of accommodation. And then impact wise we've discussed. So forwardlooking the dot plot looks at a medium policy rate of 4.1% by year end of this year. 16 policy makers seeing further tightening ahead then one more just two meetings left for this year. Probably unlikely late October cuz that's just before the midterms >> and it's a live event. >> One thing we can probably anticipate though is political friction is likely to intensify. Pressures coming down the pipe whether it's Powell or Walsh. They better run for cover cuz the next few weeks are going to get pretty spicy for them. >> Yeah, but hit a final point on that. You think about it. Walsh isn't stupid. Trump isn't going to be here in two years time, right? Walsh will be fed chair after Trump has gone away. So, he doesn't need to appease Trump for the next two years. Why? you know, ultimately, you know, his his legacy, he's been incredibly successful in his career up until this point, like mega mega mega successful, but his legacy will be how does he get on in this seat? And ultimately, you know, trying to appease Trump for 2 years and and destroying your lifetime's legacy, you know, is not an equation that adds up. So, you know, he'll do his thing. Trump will disappear in a couple of years. Um, and so yeah, independence is back. That's the big big takeaway of last night. And I think there's a bit of a sigh of relief out there in markets. I feel like if I was Trump, I would hearing what you said, I'd say, "How much does that legacy cost? Get the checkbook out. I'll get my I'll get my nephew to do a little little side deal here and we can sort you out, Kev. Come on." Worsh is like a I don't know how much he's worth, but I think it's in the hundreds of millions of dollars. >> Oh, come on. That's Trump change. Let's go. [laughter] >> Legacy. Okay. So, his figure is a big figure. It's a figure. >> Yeah. >> Here we go. >> Okay. [laughter] >> All right. Thanks everyone for listening as usual. Hopefully that is a useful episode. I know there's a lot of people thinking about a the economic climate. if you are a bit more proactive in you know self-investing and things like that but also for the student community of course that we serve this uh hopefully was a useful way to just be able to articulate market conditions and the main driving force of markets ultimately being the Fed and the US economy. So hopefully it was helpful. Don't forget to subscribe if you made it this far and you're not already following us on the channel. More content always coming out. Thanks for listening and thanks for sharing your thoughts. Piss.