FED SEPTEMBER POLICY – THE 25 BPS RATE HIKE COMES IN

FED SEPTEMBER POLICY – THE 25 BPS RATE HIKE COMES IN

At the end of the FOMC meet on 16-September, there was an absolute 12-0 consensus among the FOMC members to hike rates by 25 bps. The first rate-hike in 3 years, takes the Fed rate to the range of 3.75%-4.00%. Unlike the split decision to hold rates in July, the September FOMC meet saw an absolute necessity to hike rates to bring in price stability. The White House was not too happy, as was evident from their comments. However, the FOMC decided to put price stability on top of its priority list.

While Kevin Warsh has not been a greater believer in forward guidance, the discussions encapsulated in the Fed statement does underline one thing. There could be one more rate hike of 25 bps before the end of 2026; and that is also evident in the CME Fedwatch, which will shall look at later. The first indication of a rate hike in September came when Kevin Warsh delivered his annual address at Jackson Hole. He had minced no words in underlying that inflation was a problem and needed countermeasures. Rate hike was the answer!

WHAT WE READ FROM THE SEP-2026 FED POLICY STATEMENT

Here are key takeaways from the Fed policy statement released on September 16, 2026.

The members of the FOMC voted unanimously to hike the benchmark rates by 25 bps to the range of 3.75% to 4.00% in a 12:0 vote. The July minutes had clearly indicated that most of the members were already veering towards a 25-bps rate hike. According to Kevin Warsh, there were 3 factors that had triggered this decision.

The first factor was the strong growth exhibited by the US economy. While the GDP growth in the second quarter may have slipped to 1.5%, the rate of unemployment at 4.1% was surely under control. There were no real concerns on the macro front.

The second factor, PCE inflation, is the standard gauge for the Fed. It had come in at 3.7% for July. That is a full 170 bps above the Fed target of 2.0%. Inflation has now stayed above 2% for more than 5 years, prompting a return to focus on price stability.

While the Fed statement did not name the US-Iran war, the third factor in the rate hike was the price of Brent Crude at above $100/bbl. A mix of supply chain disruptions and lower output in the Middle East had resulted in higher prices, despite weak oil demand overall. US gasoline prices were at all-time highs.

Warsh underlined that low inflation was the key to long-term GDP growth since it impacts real GDP. It was a trade-off for the Fed between higher borrowing costs and price stability; and in this case it was price stability that won the day.

The Fed statement underlined that the problem with inflation was not just the CPI but also the producer price inflation (PPI). Both had remained well above 3.0% for a very long time on a comparative 6-month and also on a 12-month basis.

The Fed statement, was apparently, too brief for the markets to draw any conclusive signals about the future trajectory of rates. That is one reason why the CME Fedwatch shows a very ambiguous outlook beyond the current year.

The Fed statement indicated that while an October rate hike was unlikely due to its proximity to the mid-term election, there was a strong possibility of another 25-bps rate hike in December. Of course, it would still predicate on the inflation trajectory.

The Fed has also committed to keep the liquidity situation in the US economy accommodative. This will be done by open market purchases by the Fed and also by reinvesting all principal repayments of Fed holdings into treasuries.

To sum up; domestic spending in the US has been resilient, productivity gains strong, and capital investments robust. What has been out of control is the rate of inflation, due to a mix of internal and external factors. That is what Fed is looking to address.

While the Fed has avoided giving any guidance on rates, the discussions captured in the statement and the CME Fedwatch hint at one more rate hike in December this year.

WHAT DOES THE CME FEDWATCH TELL US?

CME Fedwatch simulates rate scenarios based on Fed Fund futures prices. Here are the probabilities across key meetings over next 2 years. Shaded column is current Fed rate.

Here are some key takeaways from the CME Fedwatch probabilities.

CME Fedwatch shows 50% probability of a 25-bps rate hike in October. However, considering the proximity of mid-term elections, that is less likely. A plausible scenario is of a second rate-hike in December, which looks convincing at 88.7% probability.

For calendar year 2027, the toss-up is between a 25-bps rate hike and a 50-bps rate hike by end of the year. However, due to limited guidance given by the Fed, that picture is still hazy. It would predicate on how geopolitics and the inflation story pan out.

Will this rate hike and the future trajectory of rates have an impact on India?

YES, THE FED RATE HIKES WILL IMPACT INDIA?

The Fed rate hike was along expected lines. However, it is likely to impact India in 3 ways.

The rate hike is likely to prop up the dollar index in the short run. That would mean more pressure on the Indian rupee, despite the strong FCNR(B) flows.

For the RBI, this builds up pressure to hike rates in its upcoming October RBI-MPC meet to avoid monetary policy divergence. Inflation has been sticky at around 5% in India.

Lastly, higher interest rates in the US could put further pressure on FPI flows into India. That has been a concern for some time, and any immediate respite looks unlikely.

Fed may have gone against the wishes of White House and hiked rates. However, it is clear that the days of dovish monetary policy are a thing of the past!