After weeks of speculation, the US Federal Reserve released their rate decision on Wednesday this week. Leading up to the decision, markets had been pricing a near 100% probability of a rate hike. Turns out they were correct all along.

The Federal Reserve voted unanimously to raise the Federal Funds rate 0.25% – the first such increase in over 3 years. Fed Officials also indicated another increase yet this year was likely. In his press conference, Fed Chairman Kevin Warsh spoke of energy price shocks from Middle East conflict as a key development since July, noting that the world had changed and the Fed could no longer wait and see. Warsh referred to the 0.25% increase as removing “a dose of accommodation” with accommodation meaning stimulus to the economy.

Warsh would not confirm if more increases were coming which leaves investors once again guessing as to the forward path of interest rates. With the next meeting being so close to the midterm elections, that hike may be less likely. However, Fed’s actions this week certainly went a long way in reaffirming the Fed’s independence so it may still be on the table. If you recall, President Trump placed a considerable amount of pressure of prior Fed Chairman Jerome Powell to lower rates. Many feared that Warsh would lower rates simply to appease the President that appointed him, thereby calling into question the independence of the Federal Reserve from the executive branch which is one of the core tenants of the US financial system.

As mentioned above, even after this hike, the future path of rates remains uncertain. While the Fed doesn’t want to hike so much that damage is done to the economy or labor markets, if inflation stays elevated, further rate hikes might be the only available remedy. In the past, Fed tightening campaigns have continued until something gives – in 2018 it was a sharp equity sell off. In 2023 it was the collapse of Silicon Valley Bank. Let’s hope this tightening action can simply fade and not cause a shock of any kind.

Equities were down on the news but not in a dramatic fashion as the rate hikes had been broadly forecasted and markets had already been selling off in the days ahead of the decision. However, on Thursday, the day after the decision and the time this is being written, markets had rebounded and were meaningfully higher on the day. While higher rates are not a positive for equities, neither is runaway inflation. Interest rates rose slightly on the announcement as well but were falling as well on Thursday.

This is certainly not the path anyone anticipated for rates in 2026. However, as the world around us changes, so does the economic data and the resulting need for action by the Federal Reserve. We’ll find out together where things go from here.

Onward we go,