Fed Chair Warsh raised rates as inflation persists before midterms

Fed Hikes Rates As Inflation Persists

The Federal Reserve raised interest rates last week for the first time since 2023; Chair Kevin Warsh warned inflation is too high and has been for too long.

The Fed's Summary of Economic Projections showed a hawkish shift, with sixteen of eighteen officials seeing another hike this year. Four of those policy officials expect two additional increases, and the median long-run projection reached its highest level since 2016.

Goldman Sachs added a second Federal Reserve rate hike but placed it in October, just a handful of days ahead of the United States midterm elections.

Chair Kevin Warsh characterized the central bank's current move as removing a dose of accommodation from the still-strengthening American economy. The committee did not materially change its core inflation forecast, and fifteen of eighteen officials see upside risk to core prices.

Not a single Federal Reserve policy official currently sees upside risk to the official unemployment rate, according to a Bloomberg News analysis of central bank projections.

Treasury Yields Surge Amid Debt Worries

The U.S. 10-year Treasury yield surpassed 5 percent for the first time since 2023 on Sept. 14, touching 5.01 percent intraday. It pared much of that increase as buyers emerged, but the yield remained near a level last seen in October 2023.

Bond prices fell sharply across the globe as Brent crude approached 110 dollars a barrel, with British and German government debt also sliding alongside long-dated U.S. Treasuries.

Less than two months before the midterm elections, the 10-year yield is roughly one percentage point above its pre-Iran war level. Hotter-than-expected August consumer price data prompted traders to boost bets on possible additional Federal Reserve rate hikes starting Sept. 16.

Treasury Secretary Scott Bessent has boosted bond buybacks, encouraged Japan to curb Treasury sales, and opened the door to cutting long-maturity debt issuance, but none has worked.

The sell-off also reflects deeper structural forces, with a gauge of global government borrowing costs at levels last seen in 2007. The Treasury market has ballooned to about 32 trillion dollars from 4.5 trillion dollars since 2007, pushing federal debt above GDP.

AI Spending And Key Global Meetings

Goldman Sachs estimates mega-cap U.S. hyperscalers are on track to spend roughly 800 billion dollars on their capital expenditures this year, up 94 percent from 2025.

This artificial intelligence investment boom will drive nearly half of S&P 500 earnings-per-share growth this year, but its contribution will fade. If capital expenditures were fully expensed, analysts' current consensus 2027 S&P 500 earnings per share would be 22 percent lower.

Third-quarter S&P 500 earnings are expected to grow 28.9 percent year over year, with the Energy sector leading at 109.6 percent and Technology at 63.3 percent.

Next week's focus includes global September flash purchasing managers' index reports and central bank decisions in Norway, Sweden, and Switzerland. President Donald Trump and President Xi Jinping meet Thursday, while the United Nations General Assembly debate begins Tuesday in New York.

Ed Al-Hussainy, a portfolio manager at Columbia Threadneedle, warned that if policy makers do not hike further, it is eventually going to be pandemonium for markets.