Market Developments
The Federal Reserve raised the target range for the federal funds rate by 25 basis points to 3.75%–4.00% on Wednesday, its first increase since July 2023, in a unanimous 12–0 vote. The statement said inflation “remains elevated” and that the move “will support a timelier return to the Committee’s 2 percent goal,” while Chair Warsh framed the decision as removing a dose of accommodation rather than a shift to restrictive policy. The new projections put the median policy rate at 4.1% at the end of 2026, implying one further increase this year, with median PCE inflation of 3.7% in 2026 and a return to the 2% target only in 2029; futures price close to 90% odds of at least one more increase by year end, though the timing between October and December remains close to a coin toss. The 10-year Treasury yield rose above 5% on Tuesday and Wednesday, eased to 4.94% on Thursday’s equity rally, and closed the week 3 basis points higher at 5.00%. US stocks ended mixed on the week: the S&P 500 declined 0.1%, the Dow dropped 1.7%, and the NASDAQ gained 0.9%. The moves came as Friday’s session gave back some of Thursday’s post-Fed rally.
Elsewhere, the Bank of England held Bank Rate at 3.75% on a 6–3 vote after August CPI rose to 3.1%. It also set out a new multi-year plan to unwind its gilt holdings to zero by 2034, halting outright sales of long-dated gilts and relying mainly on maturing bonds, for an average balance sheet reduction of about £46bn a year. The Bank of Japan raised rates by 25 basis points to around 1.25% on Friday, a 31-year high, in a 7–2 vote effective 24 September. The move followed a slight easing in August core inflation to 1.7%. Even so, the yen weakened rather than strengthened, as Governor Ueda signalled a slow pace of hikes from here; the Nikkei still gained 1.6% on the week.
In commodities, Saudi Arabia’s East–West pipeline shutdown after drone strikes pushed Brent back above $105 early in the week. Prices eased as Saudi Arabia set out plans to restore the line and lift loadings through Hormuz, leaving crude close to flat on the week. Separately, the IEA cut its 2026 oil demand forecast again, now projecting a contraction of 2.5 million barrels a day. The dollar index climbed to a seven-week high to 100.22, with the euro and sterling each down 1.0% on the week and the rupee easing 0.3% against the dollar. China’s August data was mixed: industrial production beat expectations at 5.2%, while retail sales slowed to 0.4%.
