Early on September 17th Beijing time, the Federal Reserve announced a 25-basis-point increase to the federal funds rate target range, bringing it to 3.75%-4.00%. This marks the first rate hike in three years. Prior to this move, the Fed had implemented six consecutive rate cuts starting in September 2024, lowering the range from 5.25%-5.50% down to 3.50%-3.75%.

The market reacted immediately to the Fed's decision. Following the announcement, all three major U.S. stock indices closed lower, with the Dow falling 1.21%, the S&P 500 dipping 0.45%, and the Nasdaq edging down 0.01%. Treasury yields climbed, with the 2-year yield briefly surging to 4.736% and the 10-year yield approaching 5.02%. The U.S. dollar index jumped 0.7% to as high as 100.36 and remained above the 100 mark at the time of writing.

Where the policy path stands now

The Fed's accompanying economic projections showed a median federal funds rate forecast of 4.1% by the end of 2026, higher than the current level. The dot plot indicated that 16 policymakers expect at least one more rate increase this year, though the dot plot does not constitute a commitment to a future policy path.

In his press conference, Fed Chair Warsh stated that the U.S. economy appears to be strengthening. The unemployment rate stands at roughly 4.1%, with increases in job openings and average weekly hours worked, alongside improvements in private sector income and capital investment. Warsh also noted that inflation remains elevated and financial conditions are not restrictive. "So we removed some of the easing," he said.

Hawkish tone: inflation fight takes priority

Judging by Warsh's comments at the press conference, he has tilted the balance toward fighting inflation over supporting employment. He offered a notably positive assessment of the U.S. economy, suggesting it still has resilience. According to the Fed's latest projections, PCE inflation is expected to reach 3.7% this year, easing to 2.3% next year, and not returning to the 2% target until 2029.

Goldman Sachs' trading desk concluded that there is a clear disconnect between Warsh's hawkish rhetoric and the inflation path implied by the dot plot. If inflation trends do not reverse in the fourth quarter, the Fed could adopt a more aggressive front-loaded hiking cycle rather than stopping after a single additional increase. Bloomberg analyst Chris Anstey noted that today's press conference carried a hawkish tone. Although Warsh offered no specific forward guidance, his characterization of this move as part of a gradual "exit from accommodative policy" suggests he remains open to further hikes unless economic data shifts.

Hu Jie, a professor at Shanghai Jiao Tong University's Advanced Institute of Finance and a former senior economist at the Federal Reserve, believes the current move is more likely a one-off hike, with subsequent decisions depending on inflation data, particularly whether PCE and CPI continue their downward trajectory. He noted that recent readings on core PCE, PCE, core CPI, and CPI show an overall downward trend, but some indicators have shown signs of slowing or stalling. With inflation still above the Fed's 2% target, the trend revealed by incoming data will weigh heavily on future decisions. If inflation declines clearly, the need for further hikes this year diminishes; if it plateaus or re-accelerates, the likelihood of another hike within the year rises significantly.

Wang Jinbin, a professor at Renmin University of China's School of Economics, believes the primary purpose of this hike is to control inflation. "This is not a precautionary hike; its main aim is to curb inflation because it's simply too high." On whether the Fed is entering a new hiking cycle, Wang said the jury is still out and will depend on incoming economic data.

Bai Xue, senior deputy director of research and development at Golden Credit Rating, sees this hike as serving dual purposes of addressing inflation and restoring credibility. The hawkish shift in the statement's language, the broadly higher dot plot, and Warsh's firm stance on inflation risks at the press conference all signal the Fed's policy stance has moved from cautious observation to proactive tightening. Looking ahead, the probability of another hike this year has risen notably. However, if core inflation does not show persistent deterioration and economic growth shows signs of slowing, the Fed is more likely to enter a high-rate plateau observation period after a precautionary hike, rather than launching a continuous hiking cycle.

Dustin Reid, chief strategist at McKinsey, commented, "The Fed is clearly focused on bringing inflation down. While that message was already clear over the summer, there was some volatility in July. I think today's decision and Warsh's comments show they are very serious about it. The unanimous vote is highly significant to me, especially given that intellectual anchors on the committee, including Waller, all supported the decision."

Juan Perez, trading director at Monex, said, "The biggest surprise in this decision is definitely the unanimous vote for a 25-basis-point hike. We see this as a very hawkish approach. The message from hiking without any dissent seems to be that they're willing to do it again. If more evidence of inflationary pressure emerges in the remainder of the year, a December hike is very likely."

Kay Haigh, global head of fixed income and liquidity solutions and chief investment officer at Goldman Sachs Asset Management, noted, "The Fed has signaled it does not intend to enter an aggressive tightening cycle at this stage. According to the SEP, most FOMC members expect a total of two hikes this year. With the October meeting falling close to the midterm elections, the Fed is likely to skip that meeting. One more hike in December is our base case, though this still depends on upcoming CPI reports and energy price movements."

Less forward guidance: Warsh's consistent communication style

Notably, this press conference lasted roughly 28 minutes, significantly shorter than recent Fed chair briefings. Warsh also repeatedly stressed he would not provide specific forward guidance. Wang Jinbin attributes this to Warsh's signature style since taking office. There are two main reasons: first, he personally dislikes offering any forward guidance to the market because future uncertainty is too high, and past Fed forecasts have shown notable deviations, making such projections unreliable in high-uncertainty environments. Second, he believes the Fed should not intervene in markets or provide guidance; markets should make decisions based on actual economic data.

Hu Jie believes that reducing explicit statements about the future policy path helps lower the risk of excessive expectations forming between the Fed and the market. If a clear policy stance had been signaled in advance, but subsequent economic data or unexpected factors such as tariffs or geopolitical events change, the expectations already built in the market could become a constraint, raising the communication cost of policy adjustments. He further noted that excessive forward guidance could create a "mirror effect" between the Fed and the market, where policy statements influence market expectations and asset prices, while financial market changes in turn become a reference for the Fed's assessment of financial conditions, forming a mutually reinforcing feedback loop.

However, Hu Jie believes that reducing forward guidance does not mean the Fed will stop communicating with the market altogether. The shift from a relatively closed communication model to greater transparency is the result of years of policy practice and adjustment. Warsh's current push to change communication methods is more likely a rebalancing of the degree and manner of communication on top of the prior high transparency, aiming to reduce the constraints that forward-looking statements place on future policy decisions.

Bai Xue emphasized that with Warsh weakening forward guidance and intensifying internal policy disagreements at the Fed, the visibility of future monetary policy has clearly declined, and global financial markets will continue to face a high-volatility environment. Short-term rates will be repeatedly repriced around December policy expectations, while long-term Treasury yields will be more influenced by inflation expectations, term premiums, and fiscal supply pressures. If the Fed delays further action while inflationary pressures continue to build, long-term yields could rise further. If the Fed implements a second hike, upward pressure on short-term rates and downward pressure on risk asset valuations will increase.