The Federal Reserve delivered its first rate hike since July 2023 on Wednesday, lifting the federal funds target range by 25 basis points to 3.75%-4% in a unanimous 12-0 decision.

The move was broadly expected. What investors are now trying to determine is whether the increase marks the beginning of a new tightening cycle or ultimately proves to be a one-off move as inflation and growth data evolve.

The Fed’s latest projections lean toward another increase. Sixteen of 18 officials see at least one more hike this year.

But the market response has already shown that the debate is not simply about the 25 basis points.

Stocks fell after the decision and Warsh’s press conference on Wednesday, with the Dow dropping 1.21% and the S&P 500 losing 0.45%.

The two-year Treasury yield rose to 4.738%, while the 10-year yield reached 5% and the dollar strengthened.

By Thursday, much of the equity selloff had reversed.

The Dow rose 0.62%, the S&P 500 gained 1.14%, and the Nasdaq jumped 1.69%, led by technology stocks. The 10-year Treasury yield fell to 4.939%.

That quick reversal has left investors focused on the next question: does the Fed actually need to hike again?

Warsh makes inflation the test

Warsh’s message after the decision was firmly centered on inflation.

The Fed’s statement said economic activity was expanding at a solid pace, domestic spending remained resilient, productivity growth was strong, and capital investment was robust.

It also said inflation remained elevated and that the rate increase would support a timelier return to the central bank’s 2% goal.

That combination matters for the next move. The Fed is facing inflation that remains above target while the economy has not yet weakened enough to force policymakers to prioritize growth.

Robert R. Johnson, professor of finance at Creighton University’s Heider College of Business, sees the move as the start of further tightening.

“This is unlikely to be a one-and-done move. This is likely the start of further tightening,” Johnson told Invezz.

He points to the futures market, which he said was assigning a 55% probability to another 25-basis-point increase after the October meeting.

Johnson’s broader argument is that inflation remains the central problem for policymakers while the labor market and wider economy have remained comparatively resilient.

“To paraphrase James Carville, ‘it’s inflation, stupid!’” Johnson said.

“The economy has been very resilient, and employment is a much less of an issue than inflation.”

Eugenia Mykuliak, founder of B2PRIME Group, reached a similar conclusion after Warsh’s remarks.

“I believe the Fed chair was clear in these statements, namely in the fact that the inflation is too high and for too long,” Mykuliak told Invezz.

“Now I’m sure there will be another rate hike for sure.”

That is also reflected in the Fed’s projections.

While Warsh again did not submit an individual projection, only two of the 18 submitted rate paths showed no further increase this year.

Inflation may not be a problem rates can solve alone

That creates the central complication in the one-and-done debate: not all of the current inflation pressure is being generated by excess demand.

J.D. Pisula, CEO of Accolade Advisory and a former bond fund manager, said the central bank has limited ability to address inflation caused by supply shocks.

“There is some risk that the Fed might negatively impact aggregate demand in the economy when the real issue is the supply shock driven by the war with Iran,” Pisula told Invezz.

The Fed, he said, “only controls one policy lever” and cannot directly control inflation caused by fiscal policy or global supply shocks.

That matters because energy prices remain an important source of uncertainty.

A persistent oil shock could keep inflation elevated even as tighter monetary policy slows interest-sensitive parts of the economy.

The issue is also highlighted by Morgan Stanley’s post-decision assessment.

Chief US economist Michael Gapen said policymakers are likely thinking about more than one move because monetary policy works with a lag.

A 25-basis-point increase, he argued, would not fundamentally alter the macroeconomic outlook by itself.

But Gapen also outlined a route to a very different outcome.

If inflation continues to moderate, he said, the Fed could intend to hike again but find that the incoming data no longer justify it.

In that case, September could become an “ex-post one and done” move even though policymakers did not enter the meeting expecting it to be the last increase.

That distinction is central to the debate.

The question is not necessarily whether the Fed intends to hike again.

It is whether the data between now and the next meeting remain strong enough to make another increase necessary.

The one-and-done case is still alive

ING is making that case explicitly.

In its September 17 assessment, ING acknowledged that the Fed’s own projections include another hike but maintained its view that September could ultimately be a one-off.

The bank points to weaker underlying labor-market trends, 3% wage growth, moderating shelter inflation and tariff-related price pressures that are increasingly incorporated.

Energy is the key variable.

ING expects oil and gas flows from the Persian Gulf to improve, allowing energy prices to resume their decline later in the year and helping inflation move lower.

If that happens alongside continued labor-market softness, the case for another hike would weaken.

ING compares the setup with the late 1990s, when Alan Greenspan’s Fed delivered a one-off “risk management” hike in 1997 before a prolonged pause.

The bond market, however, remains a source of caution.

ING said the 25bp increase had limited impact on the long end immediately after the decision but maintained a bearish stance on long-term Treasuries.

It expects the 10-year yield to move back above 5% and sees 5.25%-5.5% as attainable if inflation, fiscal deficits, issuance and AI-related investment continue to pressure longer-dated yields.

That means even a one-and-done Fed may not automatically translate into lower borrowing costs across the economy.

Markets absorb the initial shock

The first market reaction to the hike was consistent with a more hawkish policy signal.

The two-year Treasury yield, which is more closely tied to expectations for the Fed’s policy rate, jumped after the decision.

Longer-term yields were initially more contained, leaving the curve flatter. The dollar also strengthened.

But Thursday’s rebound suggested investors were able to look past the immediate policy shock.

The S&P 500 and Nasdaq both advanced more than 1%, with technology stocks leading the move, while the 10-year yield pulled back below 5%.

Easing oil prices, lower Treasury yields, and solid labor-market data helped stocks recover.

Evan Mills, a financial adviser at Scholar Advising, argues that the market is responding more to the Fed’s message than the size of the move.

“The hike was the headline, but the message was tightening,” Mills told Invezz.

Mills expects another rate increase to have its clearest effect at the front end of the Treasury curve, particularly the two-year note.

Longer-term yields, he said, are more complicated because they reflect expectations for future growth, demand and inflation as well as current monetary policy.

The equity implications are also uneven. Mills said expensive growth stocks and highly leveraged companies are more exposed to higher rates because of the effect on discount rates and financing costs.

But he sees a limit to that pressure.

“I still think stocks can handle one more rate hike better than they can handle the return of the inflation problem,” Mills said.

Tim Thomas, CFA, CIO and wealth manager at Seattle-based Badgley Phelps Wealth Managers, takes a similar view that a limited tightening cycle need not derail equities.

“We are not too concerned about a couple of 25-basis-point rate increases given the strength in the economy and the tremendous growth in corporate earnings,” Thomas told Invezz.

“If monetary policy tightening is relatively modest, we expect the growth in earnings and the economy to be the primary drivers of equity prices, sustaining the bull market.”

Thomas expects the Fed to avoid an extended series of increases, although he said markets could face a period of choppier trading along the way.

The data now decide

For now, the Fed has left both possibilities open.

Its projections clearly lean toward another hike, with 16 of 18 officials expecting at least one more increase this year.

Inflation forecasts were also revised higher, while the median 2026 PCE inflation forecast rose to 3.7% from 3.6% in June.

At the same time, the unemployment projection was lowered to 4.1% from 4.3%, and the growth forecast was nudged higher.

Those numbers make another hike easier to justify if inflation stays elevated.

But ING and Morgan Stanley highlight the other side of the equation: monetary policy operates with a lag, labor-market weakness may be greater than the unemployment rate suggests, and some inflation pressures could ease without additional tightening.

The market reaction has so far reflected that uncertainty.

Wednesday’s selloff showed the cost of the Fed’s hawkish message; Thursday’s rebound showed that investors were not treating the decision as the beginning of an inevitable prolonged tightening cycle.

The next few inflation and employment reports will therefore matter more than the September decision itself.

The Fed has shown that it is willing to tighten again. Whether it actually does so will depend on whether inflation remains stubborn enough, and economic growth resilient enough, to make another hike necessary.

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