- US: The Fed delivered an unanimous 25 bps rate hike amid persistent inflation; we expect two additional hikes to a 4.5% peak, though the financial market, AI, debt, labour, and geopolitical shocks could derail this path
- Eurozone: 1H26 resilience reinforced our marginal 2026 GDP upgrade; the ECB is likely to deliver an additional 50 bps of rate hikes, likely at its Dec 2026 and Mar 2027 meetings
- China: Exports kept growth afloat, with industrial activity improved despite soft domestic demand. Consumption, investment, and credit demand stayed subdued.
- India: August inflation rose 4.8% y/y, the highest since Dec 2024; a sustained rise in crude prices, firm domestic growth, and signs of broadening in core pressures strengthen the case for a shallow 50 bps hike in 2HFY27, making October’s meeting a live one
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US: Unanimous rate rise sets up one more hike this year. The US Federal Reserve delivered a widely anticipated rate hike at the conclusion of the 15-16 Sep FOMC meeting. We had expected a contentious outcome that could result in no change, but the entire committee came together to vote in favour of a rate hike. Persistent inflation, compounded by an array of demand (AI build-out), supply (oil shock), and policy (tariffs) factors, has pushed the Fed into a corner that was not anticipated just six months ago. A 25 bps hike to 4% in the Fed Funds Rate set the stage for more hikes ahead, as reflected in the vast majority of the FOMC members’ projections.
We now pencil in one more rate hike this year and another early next year, taking the terminal rate of this short cycle to 4.5%. In making this call, we take note of the points made by Fed Chair Warsh last month – that monetary conditions are not tight, the pace of inflation returning towards the 2% target is yet to be satisfactory, and short-term interest rates remain the key tool to dealing with the Fed’s mandate. The latest statement also suggests sufficient comfort with GDP growth, consumption, the labour market, and productivity to retain a focus on inflation for the time being.
Much could cause this rate-hike path to be derailed. A large market sell-off, public debt crisis, AI-related cataclysmic event, slippage in the labour market, or major worsening of the geopolitical environment could force the Fed to shift its focus from inflation to economic stabilisation. At the other end of the risk spectrum, continued fiscal slippage and greater pressure on prices and wages due to the AI boom could leave the market unsatisfied even with the policy rate at 4.5%.
Bottom line, the about-turn by what had seemed like a dovish Fed Chair just a few months ago underscores the challenges embedded in this cycle. While inflation may be largely supply-side driven, there are enough risks to the inflation outlook to warrant more action in the coming months. This is particularly the case as the Fed’s leadership appears keen to stamp credibility in a vigorous manner.
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Related insights
- DEER: Policy and the undervalued JPY 22 Sep 2026
- USD Rates: Optimistic start22 Sep 2026
- Hoping for relief to shift from the Fed to geopolitics22 Sep 2026
Related insights
- DEER: Policy and the undervalued JPY 22 Sep 2026
- USD Rates: Optimistic start22 Sep 2026
- Hoping for relief to shift from the Fed to geopolitics22 Sep 2026