Why investors’ best move in reaction to Fed’s rate hike is doing nothing at all

On Friday, US Treasury yields surged back to 5%, reaching their highest level since 2007. The Federal Reserve's decision to raise interest rates on Wednesday played a significant role in this increase. The Bank of Japan also joined the trend, raising its interest rates for the first time in 31 years, marking a 25 basis point increase.

This wave of global tightening by major central banks aimed to curb inflation from escalating. The Middle East conflict uncertainty further drove oil prices up, adding to inflation risks. As a result, the Fed and BoJ raised rates to make borrowing more expensive and to discourage spending, which could help control inflation. This move made US bonds less attractive, pushing their yields higher.

The Fed's decision was a clear signal that they foresee more rate hikes in the future, with market expectations now at 34 basis points of tightening by the end of 2026. The odds of a rate hike in October stood at 55%, while in December, the probability rose to 90%. Despite the US economy showing a flat industrial production growth in August, investors are closely watching upcoming economic data, including speeches from Fed officials, jobs reports, and S&P Flash PMIs.