Author: Davis Finke, CFA
On Wednesday, the Federal Open Market Committee (FOMC) voted unanimously to increase interest rates by 25 basis points to a range of 3.75%-4.00%, marking the first rate hike since July 2023. The move was widely expected, as Chair Warsh has been clear that the Fed’s primary focus is on returning inflation to its 2% target. However, guidance around the future path of policy was more hawkish than investors had anticipated. Of the 18 officials, 16 projected at least one additional rate increase this year, while four penciled in two increases. For 2027, the median FOMC forecast calls for rates to remain in the 4.00%-4.25% range, although eight officials projected an additional increase. During the press conference, Chair Warsh struck a hawkish tone, emphasizing concern over sticky underlying inflation and characterizing the increase as “removing a dose of policy accommodation.” The comment suggests that he does not view the current policy stance as significantly restrictive and leaves room for further tightening. The Fed also released updated economic projections on Wednesday. FOMC participants projected 2026 real GDP growth of 2.3%, up from 2.2% in June, while the projected unemployment rate improved from 4.3% to 4.1%. Inflation projections were revised higher, with the 2026 projection rising to 3.7% before falling to 2.3% in 2027. Although higher interest rates are generally considered a headwind for equities, markets rallied on Thursday as oil prices and long-term Treasury yields fell.
U.S. equities started the week on shaky footing, posting three consecutive losing days before rallying on Thursday. Weakness earlier in the week was partly fueled by AI-related concerns after several CEOs of leading AI labs endorsed slowing the pace of advanced-model development. The calls reflected concerns that safety and governance measures may not be keeping pace with increasingly capable models, potentially leaving companies unable to fully understand or control their behavior. Adding to the negative sentiment was the continued rise in oil prices and bond yields after planned diplomatic talks between Iran and several Gulf nations were postponed. However, reports that Saudi Arabia could bring additional oil supply to global markets through alternative routes helped send oil prices lower on Thursday, while long-term Treasury yields also declined, supporting a late-week equity rally. The tech-heavy Nasdaq was able to regain the most ground, finishing the week up 0.93%. The S&P 500 also recovered much of its earlier losses, closing out the week down 0.17%. The Dow Jones was the main laggard, down 1.72% for the week. At the sector level, health care was the main bright spot, finishing the week with a gain of 1.83%. Technology was the only other sector to finish the week higher, advancing by 1.03%. Of the nine sectors that finished the week lower, eight fell by more than 1%, while losses in financials and utilities both exceeded 2%. Notably, the energy sector was down 1.27% this week, as the price of Brent crude oil posted a weekly decline of 1.52%.
Looking ahead to next week, geopolitics, oil prices, and yields will remain in focus. President Trump is reportedly planning to meet with the leaders of several Gulf states next week on the sidelines of the UN General Assembly. With the positive relationship between oil prices and bond yields strengthening to its highest level since 2020, developments in energy markets stemming from these discussions could have meaningful implications for market sentiment and overall performance. Also on the schedule for next week is a meeting between President Trump and Chinese President Xi Jinping. The visit will mark Xi’s first trip to the U.S. since 2023, with a possible extension of the U.S.-China trade truce, which is set to expire in November, expected to be among the key topics.
