Citic Securities Company Limited has released a research report indicating that the Federal Reserve's September rate hike of 25 basis points aligned with expectations, while upward revisions to growth and inflation forecasts, along with the dot plot and remarks from Federal Reserve Governor Christopher Waller, all signaled a hawkish stance. The intense market pressure made the rate hike a natural move for the Fed. The pace and magnitude of subsequent Fed rate increases will largely depend on oil prices, which remain difficult to predict, but with headline inflation likely to decline noticeably by early next year, the case for further hikes should weaken by then.
The report projects one more 25 basis point hike this year, followed by a pause in 2025. With US financial conditions unlikely to ease meaningfully, investors should seek assets with fundamental support rather than those benefiting solely from liquidity, within the context of the growth narrative.
The Fed delivered its widely anticipated 25 basis point hike in September, bringing the target range to 3.75%–4%. The decision was unanimous, with the statement noting that this increase would support a timelier return of inflation to the 2% target. The dot plot showed median federal funds rate expectations of 4.1% for both this year and next, up from 3.8% and 3.6% respectively in June. Among the 18 officials, 12 anticipate one more hike this year and four expect an additional 50 basis points, a notable shift from the previous dot plot where only six officials projected rates above 4% this year.
The Summary of Economic Projections raised real GDP growth forecasts by 0.1 percentage points to 2.3% for this year and 2.4% for next, lowered unemployment projections to 4.1% across the next three years, and increased both headline and core PCE inflation estimates by 0.1 percentage points to 3.7% and 3.4% respectively for this year. These changes reflect the Fed's optimism about economic resilience and concerns over persistent inflation.
Governor Waller stated that the decision removes some accommodation, adding that the FOMC lacks confidence in inflation returning to target and sees little evidence that inflationary trends have passed the test. When asked why rate hikes would be effective against energy supply shocks, he noted that while the Fed cannot influence individual prices, it will ensure any price changes do not spill over into other areas or create second and third-order effects on the economy.
Markets had fully priced in this rate hike before the meeting, with CME FedWatch showing nearly 90% probability of an increase this month and expectations of four cumulative hikes by mid-next year. This overwhelming market pressure made the rate hike the safest option for the Fed. With Brent crude breaking above $100 again, markets have gradually accepted September as the potential starting point for a new tightening cycle. Following the hawkish guidance, two-year Treasury yields surpassed 4.7%, ten-year yields returned above 5%, and gold prices fell below $4,300 per ounce. Waller attributed the recent rise in long-term yields to three factors: robust US economic growth, capital competition from cloud provider financing, and geopolitical disruptions to energy and food prices.
The path of future rate hikes hinges largely on oil prices, which are inherently unpredictable. However, a solid but not overheated labor market does not support a wage-price spiral, and four consecutive years of rising rental vacancy rates suggest modest rental inflation momentum. The risk of second-round inflation from energy shocks remains limited, and headline inflation is likely to decline meaningfully by early next year, weakening the rationale for further hikes. The report expects one additional 25 basis point hike this year, with no action anticipated next year.
With oil prices hovering just above $100 per barrel—a level insufficient to trigger recession fears yet deep enough to amplify inflation concerns—dollar liquidity is unlikely to ease meaningfully. Long-term yields lack clear downside room, making right-side positioning a better choice once the path of Middle East conflict resolution becomes clearer. Gold's rebound conditions are fragile, requiring careful trading timing. The dollar index has support and may oscillate around 100 this year.
Given ongoing uncertainties surrounding Middle East geopolitics, rate hike expectations, and midterm elections, US equities may remain largely range-bound in the near term. However, under the growth narrative, they could be relatively easier assets to build consensus around, with potential opportunities for dip-buying.
Risk factors: Middle East developments or energy shocks exceeding expectations; Fed inflation tolerance falling short of projections; unexpected shifts in Fed policy approach; and market liquidity and sentiment changes beyond expectations.
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