Fed Raises Rates for First Time Since 2023 as Warsh Signals Inflation Concerns

Market Wrap-up: Fed Rate Hike Lifts Dollar as Equities and Gold Decline

The Federal Reserve (Fed) raised its benchmark interest rate by 25 basis points to a target range of 3.75%-4.00% on 16 September, marking its first rate increase since July 2023. The decision was unanimous, with policymakers citing persistently elevated inflation and the need to restore price stability.

Although the move was widely anticipated, US equities came under pressure following the decision and during Chair Kevin Warsh’s press conference. Warsh reiterated that inflation remained too high and that recent data had shown limited improvement in underlying price trends. 

The Dow Jones Industrial Average fell 631.21 points, or 1.21%, to 51,461.90. The S&P 500 declined 0.45% to 7,551.81, while the Nasdaq Composite edged down 0.01% to 25,978.42.

The Fed’s updated projections indicated that most officials expected at least one further rate increase this year. The dot plot showed that 16 of 18 participants anticipated another hike, including four who projected two additional increases. 

For 2027, policymakers were divided, with eight expecting another increase, six projecting unchanged rates and four anticipating a cut.

The central bank also raised its inflation forecasts slightly. Headline PCE inflation is projected at 3.7% this year, while core PCE inflation is expected to reach 3.4%, both 0.1 percentage point above the June projections. The Fed expects inflation to ease in 2027, with its projections showing the 2% target being reached in 2029.

Warsh said inflation remained elevated and that recent summer data had shown limited progress. He also highlighted the economic outlook and geopolitical uncertainty, while declining to provide specific forward guidance and emphasising that future policy decisions would depend on incoming economic data.

Against this more hawkish policy backdrop, the US dollar strengthened, with the US Dollar Index (DXY) moving above the 100.00 psychological level. Treasury yields also rose, with the 10-year yield moving back above 5%. 

Higher borrowing costs and inflation concerns added to pressure on equities, while the stronger dollar and higher interest rates weighed on gold.

Meanwhile, oil prices fell on 16 September after US officials sought to reassure markets that Saudi Arabia’s damaged East-West pipeline would resume operations within days. 

WTI crude declined 3.2% to $102.43 a barrel, while Brent fell 2.7% to $105.83. The pullback eased some immediate pressure from energy prices, although both benchmarks remained more than 16% higher for the month amid escalating conflict in the Persian Gulf.

Markets will now monitor US labour-market and housing data, alongside the Bank of England’s policy decision on Thursday. The BoE is widely expected to hold rates steady, with attention focused on its guidance amid elevated energy prices and changing inflation expectations.

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DXY:

Key takeaway:

• The US dollar strengthened, with DXY breaking above the 100.00 psychological level.
• Hawkish Fed signals and expectations for further policy tightening supported the dollar.

Technical Outlook:

• Daily Bias: Bullish
• Support: 100.00
• Resistance: 100.40

Gold:

Key takeaway:

• Spot gold reversed its intraday gains, falling 1.2% to $4,240.10/oz.
• Higher interest rates and dollar strength weighed on non-yielding gold.

Technical Outlook:

• Daily Bias: Bearish with Rebound Potential
• Support: 4,235 
• Resistance: 4,402

Oil:

Key takeaway:

• WTI fell 3.2% to $102.43, while Brent declined 2.7% to $105.83.
• Both benchmarks remained up more than 16% this month despite the pullback.

Technical Outlook:

• Daily Bias: Cautiously Bullish
• Support: 100.52 
• Resistance: 106.76

Dow Jones:

Key takeaway:

• The Dow dropped 631.21 points, or 1.21%, to 51,461.90.
• Selling pressure intensified during Warsh’s press conference.

Technical Outlook:

• Daily Bias: Bearish
• Support: 51,167 
• Resistance: 52,274

GBP/USD:

Key takeaway:

• GBP/USD fell below 1.3400 for the first time since late July.
• Traders turned their attention to the BoE’s rate decision and forward guidance.

Technical Outlook:

• Daily Bias: Bearish with Rebound Potential
• Support: 1.3333 
• Resistance: 1.3513

Calendar Watch:

• US: Initial jobless claims, housing starts, building permits, pending home sales and the Philadelphia Fed Manufacturing Index.
• UK: Bank of England interest-rate decision and policy guidance.

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