Once the Federal Reserve starts the rate hike cycle, is "three consecutive hikes" a reasonable expectation?

The current market has largely reached a consensus on the Federal Reserve's rate hike next week, but what truly concerns investors is: how far this rate-hike cycle will go and in which market segments will the ongoing tightening of monetary policy exert the greatest pressure?

On September 11, according to MarketWatch, BMO Capital Markets Head of U.S. Rate Strategy Ian Lyngen expects that after a 25 basis point rate hike by the Federal Reserve this month, there will be additional rate hikes at the October and December meetings, for a total of three hikes that will push the federal funds rate target range back to 4.25% to 4.5%, effectively erasing the rate cut gains orchestrated by former Fed Chair Powell for 2025. Vanguard Senior U.S. Economist Josh Hirt also noted that three rate hikes are "a fairly reasonable starting point" for evaluating the Fed’s path, but he also pointed out that the potential range could be as wide as one to six hikes.

In terms of market vulnerabilities, analysts have identified two major potential risk exposures: the optimism underlying the artificial intelligence spending boom and the insurance industry’s large-scale holdings in private credit. Meanwhile, concerns over the expansion of the U.S. fiscal deficit are mounting. Should the 10-year Treasury yield reach 5%, the market could face a new wave of selling pressure.

"Three Consecutive Hikes": Historical Patterns and Current Expectations

Economists generally point out that the Federal Reserve rarely settles for just a single rate hike in its history.

According to reports, Monetary Policy Analytics economist Derek Tang stated that once rate hikes begin, policy inertia tends to drive multiple consecutive actions.

Ian Lyngen’s baseline forecast is 25 basis point increases in July, October, and December respectively. If this path is realized, the federal funds rate will return to the 4.25% to 4.5% range—equivalent to the peak before rate cuts at the end of 2024, meaning all the easing seen over the past year or more would be fully reversed.

Josh Hirt, however, provides the market with a broader scenario framework. He stated, the reasonable range for rate hikes is one to six times, and three is just the starting point for consideration; the final path will depend on the evolution of inflation data.

It is worth noting that there are historical exceptions: in 1997, the Fed raised rates only once and then took no further action for 18 months before shifting to rate cuts.

AI Spending Boom: One of the Biggest Pressure Points in a High Rate Environment

Derek Tang clearly identified the highly optimistic expectations behind the artificial intelligence spending cycle as one of the most critical weak points in the current tightening environment.

Allianz Investment Management Senior Portfolio Manager Charlie Ripley explained the transmission mechanism: AI “hyperscalers” are expected to spend up to $1 trillion in annual capital expenditures over the next few years, and these companies rely heavily on debt financing. Rising long-term rates will directly push up borrowing costs and constrain ROI.

According to reports, Rockefeller International Chairman Ruchir Sharma recently wrote in Financial Times expressing similar concerns: when U.S. government bond yields rise to 5%, large tech companies will have to compete directly with the government for debt financing, some companies could therefore be squeezed out of the financing channel, and the AI boom cycle faces the risk of being prematurely ended by high borrowing costs.

Charlie Ripley also agrees that once the 10-year U.S. Treasury yield hits 5%, it could become a tipping point that triggers a wave of market selling.

Private Credit and Insurance: Overlooked Systemic Risks

The second vulnerability pointed out by Derek Tang is the insurance industry’s massive allocation to private credit.

The International Monetary Fund (IMF) has previously issued warnings about this: insurance companies partly or fully owned by private equity firms lack transparency and tend to allocate to riskier fixed-income assets. Should sharp rate volatility cause losses, risks could spill over from the insurance sector to the banking system, creating cross-sector systemic transmission.

Tang stated, “This is an area I believe market participants should pay more attention to.”

Key Differences Between This Rate Hike Cycle and Past Crises

Despite clear risk points, Vanguard’s Hirt believes the potential rate hike cycle under way is fundamentally different from cycles that triggered major financial crises in the past and should not be simply likened to them.

He pointed out, the 2023 Silicon Valley Bank failure and the 1994 Orange County municipal bankruptcy both happened under the background of a sudden reversal in Fed policy expectations—at that time, rates shot up from low levels and the market was caught off guard. The current situation is quite different:

The Federal Reserve went through a significant rate hike cycle from 2022 to 2024, rates remain at elevated levels, and the market is not unfamiliar with the policy direction. If there are further hikes this time, the aim is primarily to find an appropriate rate level to exert downward pressure on inflation, not to overturn the market narrative.

The report points out that this judgment provides the market with some buffer logic, but analysts widely stress that the structural vulnerabilities in the AI financing chain and private credit sector must continue to be closely monitored.