Key Highlights

● The Fed lifted rates a quarter point in September, its first hike in three years.

● Hike odds by December were put at roughly three in four in one market summary.

● The 10-year yield eased to around 5.1 after topping 5.30, its highest since 2002.

● Bank CEOs said AI investment is continuing despite higher rates.

A turning point

In September, the Federal Reserve raised its benchmark rate by a quarter point, its first increase in three years. The move marked a change in direction after a long stretch without hikes, and it has shaped market behavior ever since.

The question now is whether September was a one-off adjustment or the start of a new tightening cycle. Markets are leaning toward the latter. Futures data showed roughly three-in-four odds of another hike by December, up from about half a month earlier. Another market summary put the odds of a hike by year-end at better than nine in ten.

Inflation keeps the pressure on

The data since the hike have done little to settle nerves. September CPI, released Wednesday, showed annual inflation accelerating from August and topping expectations, according to a weekly market summary. Producer prices posted their largest monthly gain since March 2022. On Friday, import and export prices both rose more than forecast. Industrial production beat estimates and reached its highest level since 2018.

Bank of America, which still expects an October hike, pointed out that more than half of the core CPI basket shows elevated three-month annualized increases.

Energy prices add to the picture. Brent crude rose to $109.86, its highest since May 19, amid Iranian attacks on tankers in the Strait of Hormuz. US gasoline averages $4.33 a gallon, compared with $3.06 a year ago.

Warsh keeps options open

Fed Chair Kevin Warsh has avoided committing to a path. "I don't prejudge meetings," he told an IMF gathering in Bangkok. Market reports said he indicated that global performance has broadly matched Fed expectations since the September hike, and that he would not pre-announce decisions at the remaining two meetings of 2026.

The near-term odds have swung sharply. A hike in October looked close to a coin flip in futures pricing after Wednesday's CPI, but the probability fell to about one in six by Friday.

Markets under strain

The renewed tightening has coincided with heavy pressure on Treasury yields and growth stocks. The 10-year yield topped 5.30 earlier in October, its highest since 2002, before easing to around 5.1 on Friday.

On Friday, the Nasdaq Composite sank 572.99 points to 26,140.03, and the S&P 500 fell 84.62 points to 7,659.44. Rate-sensitive groups were hit, with market commentary citing borrowing costs in declines for Intel (NASDAQ:INTC), Lam Research (NASDAQ:LRCX) and Vishay Intertechnology (NYSE:VSH). Opendoor Technologies (NASDAQ:OPEN) fell as higher yields weighed on financed purchases, the same commentary said.

Banks have offered a different read. Citizens Financial (NYSE:CFG) CEO Bruce Van Saun said, "Even with higher rates, the kind of desire to get the compute power in place, the players aren't really batting an eyelash." PNC Financial Services (NYSE:PNC) CEO William Demchak said, "The clouds are as dark as they ever were, but the economy's still strong. People are investing into it."

September Hike Aftermath Calendar

Housing starts on Oct 20, jobless claims on Oct 22, and S&P Global PMIs and University of Michigan sentiment on Oct 23 lead into the Fed's next decision on Oct 28. PCE inflation and the first third-quarter GDP estimate follow Oct 29.