Probably Not Just Once or Twice! Fed’s Hawkish Tone Returns as Wall Street Prepares for More Rate Hikes

According to Zhitong Finance APP, Wall Street is seeking clues from the Federal Reserve’s statements to prepare for more potential rate hikes this year. Last week, the Federal Reserve voted unanimously to raise the federal funds rate target range by 25 basis points to 3.75%-4% in order to curb inflation. This was the Fed’s first rate hike since July 2023. Meanwhile, the latest dot plot shows that the Fed’s policy path is adjusting toward “higher for longer”—with the median federal funds rate forecast rising to 4.1% by the end of 2026, and most officials supporting at least one more hike later this year.

Investors currently estimate there is a more than 50% chance the Fed will hike rates again in October. Michael Gause, Chief Investment Officer of Global Fixed Income at Principal Asset Management, said in an interview: “This may not end with just one or two hikes.” He added: “If they are genuinely trying to control inflation by suppressing demand, the tightening could be more aggressive.”

The Fed stated in its policy declaration that U.S. economic activity continues to expand at a robust pace, domestic spending remains resilient, productivity growth is strong, capital investment is robust, job growth keeps pace with labor force growth, and the unemployment rate is little changed; meanwhile, inflation remains elevated, and this policy action is intended to help bring inflation back to the 2% target in a more timely manner.

At the press conference, Fed Chair Walsh said that the Fed has “withdrawn some accommodation” with the aim of making financial and credit conditions more consistent with achieving its ultimate policy goals. He especially emphasized that prices in too many categories of goods and services are still rising at an annualized pace of over 3%, and that this summer’s inflation data did not convince him there has been meaningful improvement in the underlying inflation trend.

Prior inflation data had reinforced the Fed’s case to tighten policy again. Core inflation in August rose more than expected, raising market concerns that price pressures might be spreading into broader areas beyond tariffs and energy price shocks. The Fed’s latest projections show the median PCE inflation rate at 3.7% in 2026 and the core PCE inflation rate at 3.4%; more notably, officials now expect overall PCE inflation will not return to 2% until 2029, a further delay from previous forecasts.

Judging from the Fed’s own signals, the current policy focus remains clearly on controlling inflation. The official statement emphasized that inflation remains high, while economic activity is robust, capital investment is strong, and the job market has not witnessed obvious deterioration—which means the Fed still has room to use higher rates to suppress price pressures. Therefore, last week’s 25-basis-point hike may not be a one-off adjustment. Upcoming data on inflation, employment and energy prices will be key to determining whether the Fed will continue tightening policy later this year.

After the Fed signaled last week that monetary tightening could continue, the market quickly reacted. Michael Gapen, Chief U.S. Economist at Morgan Stanley, subsequently revised his forecast to three hikes in total—including last Wednesday’s hike—up from the two previously projected.

Goldman Sachs economists now expect the Fed's next move will be another 25-basis-point increase in October, revising their previous view that September would be the only hike. They also noted that this meeting was more hawkish than expected, citing both the unanimous vote and Walsh describing the hike as “withdrawing a dose of accommodation.”

Veteran Wall Street strategist Ed Yardeni last week cut his year-end target for the S&P 500 from 8,400 to 7,900, citing expectations for more than one rate hike this year. Yardeni wrote: “The risk is that oil prices will stay high for longer, continuing to push bond yields higher.” He hinted that this rate hike from the Fed might just be the beginning of a rate-hiking cycle. He stated: “The longer oil prices remain elevated, the greater the risk that inflation becomes entrenched, especially if the economy remains resilient.”

In contrast, Bank of America equity strategist Savita Subramanian believes the S&P 500 will present a better entry point. She noted: “We are entering a seasonally weak period, and in our view, the market is overdue for a correction.” The firm expects the Fed will raise rates again in both October and December this year, and marginally lifted its year-end S&P 500 target to 7,400, suggesting about a 3% downside from current levels.

Wall Street strategists pointed out that despite multiple headwinds, including rising bond yields, oil prices and a stronger dollar, the S&P 500 remains resilient. Horizon Chief Investment Officer Scott Ladner said: “If some of these headwinds start to ease, and we maintain this level of profitability, then we will look forward to the fourth quarter.” Ladner stated that investors should pay attention to “the second stage of the AI capex downstream effect,” such as infrastructure-related companies, which may benefit from associated spending in Q4.

Additionally, in a rising rate environment, J.P. Morgan Asset Management Global Market Strategist Jordan Jackson recommends “maintaining a healthy balanced allocation between growth and value stocks.” He also favors large-cap stocks over small-caps, as the latter are more sensitive to rising interest rates.