Analysis-Fed builds credibility, but hawkish turn leaves investors edgy

The Federal Reserve has solidified its commitment to fighting inflation, raising interest rates for the first time since 2023 despite President Donald Trump's calls for rate cuts. The unanimous decision, following a 9 to 3 vote just months prior, has bolstered the central bank's credibility and independence in the eyes of some analysts.

Matthew Miskin, co-chief investment strategist at Manulife John Hancock Investments, noted that the meeting adds trust to the market. However, the hawkish turn leaves investors uncertain about how far the Fed will go to keep prices in check, causing volatility in stocks and bonds. Higher rates could slow the economy, raise borrowing costs for consumers and companies, and pose a headwind for the performance of risk assets.

The unanimous vote among Fed officials following the last meeting in July increased the probability of another rate hike before the end of the year, prompting investors to recalibrate their strategies for the easing cycle expected in early 2026. Despite the hawkish tone, forecasts suggest only one more rate increase this year, with the Fed likely holding steady in 2027.

The latest inflation data shows the core Personal Consumption Expenditures Price Index running 3.3% annually, well above the 2% target. Fed Chair Kevin Warsh, appointed by Trump, has been seen as hawkish, raising expectations for a hike but also creating uncertainty due to his reluctance to provide forward guidance on the rate path.