Fighting Inflation! Fed Raises Rates by 25bps as Expected; Cathay United Bank Forecasts Another Hike in December

The U.S. Federal Reserve concluded its FOMC meeting, unanimously approving a 25-basis-point increase in the federal funds rate target range to 3.75%–4.0%. This marks the first rate hike under Chair Kevin Warsh and aligns with market expectations. Cathay United Bank released its latest market outlook today (17th), stating that the rate hike was driven by strong real economic performance, limited improvement in summer inflation, and rising geopolitical tensions. The bank anticipates a high probability of another 25-basis-point rate hike in December if core inflation continues to exceed the target.

Cathay United Bank analyzed the latest dot plot, noting that the median projections for 2026 and 2027 interest rates have both been raised to 4.1%, with eight officials supporting further hikes next year—indicating a significant hawkish shift within the Fed. However, the bank believes that after a cumulative 50-basis-point rate hike this year, the Fed will shift focus to assessing the actual impact of tightening measures on inflation, rather than entering a prolonged cycle of aggressive rate hikes. Additionally, with higher base effects in energy prices expected in the first half of next year, inflation growth is projected to gradually moderate.

Regarding financial market trends, the bank stated that in equities, stronger-than-expected tech earnings and solid revenue momentum provide downside support for the broader market. However, elevated U.S. Treasury yields are pressuring stock valuations, and with the U.S. midterm elections approaching and companies adopting a more cautious stance on AI-related capital expenditures, market volatility is likely to persist through year-end.

In the bond market, U.S. Treasury yields are expected to remain elevated amid expectations of another rate hike by year-end and rising issuance volumes of both government and credit bonds.

In foreign exchange, rate hike expectations are expected to support the U.S. dollar index, easing its recent weakness. However, considering that major global central banks are also raising rates in tandem, the dollar index is expected to trade near the 100 level in the short term.

Cathay United Bank highlighted that Chair Warsh reiterated a 'non-data-dependent' policy stance post-meeting, emphasizing that central bank policy will focus on the overall macroeconomic trend rather than reacting excessively to short-term data fluctuations. This signals the Fed’s determination to avoid frequent policy swings and anchor long-term inflation expectations, demonstrating a firm resolve to prevent the spread of inflationary psychology.