The US Federal Reserve‘s Federal Open Market Committee (FOMC) voted unanimously to raise benchmark rates by 25 basis points. The move was widely expected, but market indices took the news poorly, with most sectors closing down for the day.
At the same time, yields of shorter-term treasuries rose, with the important 10-year holding above 5%.
Fed Chairman Kevin Warsh was habitually curt in answering questions during the short presser. Warsh has consistently said he prefers not to add color on decisions or future expectations beyond what is officially released.
Isaac Wheeler, Managing Director of Balance Sheet Strategy at Derivative Path, said the hike signals the policy path ahead and the implications for banks and broader capital markets.
“Today’s unanimous rate hike sends a clear message: reducing inflation is the FOMC’s primary objective, especially with the employment side of the dual mandate still strong. The market had priced in a hike, but the Dot Plot and Warsh’s press conference surpassed those already hawkish expectations, and rates are higher at the front end of the curve as a result,” explained Wheeler. He added that they are watching how the administration will react, as the “Treasury is the new Fed,” and there appeared to be little coordination between the two entities.
Wheeler noted that Warsh declined to engage entirely when probed on the administration’s desire for lower rates. When asked about government deficits, a nagging, growing problem, he did not take the bait. Warsh did discuss competition for capital in the AI sector and the hyperscalers, something they are studying.
Like many others, Wheeler sees a complex environment, as high energy costs affect all prices while labor markets remain robust.
Bitget Analyst Lewis Huang addressed the impact on Bitcoin, as he believes it absorbs more of the rate shock than equities.
“The market had one hike priced, and the dots have given it a sequence. Deutsche Bank expected two increases by December, Bank of America three, and the committee has settled that argument hawkishly. Bitcoin is likely to absorb more of the shock than equities. On the last two rate-driven days, it moved roughly four times the S&P. What makes this path fragile is what is driving it. Core annual inflation came in at a five-year low on Friday, and the move up in the headline was gasoline, up 3.9% in a month, and diesel, up more than 60% on the year. Those pressures can reverse faster than underlying inflation, creating a risk that the Fed is still tightening after the original energy impulse has begun to fade.”
Markus Levin, co-founder of XYO, also looked at the impact on Bitcoin, sharing that he would watch Treasury yields and liquidity more closely than the 25-basis-point move itself.
“Bitcoin has already absorbed a significant amount of higher-rate expectations, and if yields stabilize, the asset can continue to trade on institutional demand and improving liquidity rather than simply on Fed policy. If markets start pricing in several additional hikes, that would put more pressure on risk-on assets. For now, I see this as a period of tighter financial conditions rather than a fundamental change in Bitcoin’s longer-term market structure.”
Levin says the AI buildout could eventually deliver a productivity boost, and this could boost productivity in the wider economy; it could give the Fed more room to ease later without reigniting inflation.
“That would be a constructive setup for risk assets, including crypto, because the market could move from worrying about the cost of AI investment to pricing in the economic growth it can ultimately produce.”
Iggy Ioppe, Chief Investment Officer at Theo, looked at the rate increase from gold’s perspective, noting that ETF holdings are at a record 4,189 tonnes after August took in $18 billion, the second-largest monthly inflow on record. Push dollar funding another 25 basis points, and borrowing the metal itself gets cheaper relative to borrowing the money to buy it,” said Ioppe.
Fabian Dori is Chief Investment Officer at Sygnum Bank, said the decision was largely priced in and what matters here is signaling there is more to come and the cost of it is feeding into broader and more persistent inflationary pressures.
“For digital assets, the immediate impact is likely through higher yields, the dollar and tighter financial conditions. But the more relevant question is whether the structural liquidity channels tighten alongside monetary policy. Treasury cash balances, private credit creation and stablecoin supply set conditions on a longer clock than any single meeting.”
It was interesting to watch the punditry discuss rates and what the Fed should be doing, with some calling for no increase and others declaring the Fed should have been more aggressive, choosing a 50 bps increase.
What is clear is that the war in the Gulf is a difficult-to-predict variable, and upcoming midterm elections in the US could make the Administration nervous. The best-case scenario would be a capitulation in Iran and a truce between Russia and Ukraine, but there is no immediate indication either is on the cards in the coming weeks.