Market Update - The Fed raises rates as inflation remains stubborn
21 September 2026
Jose Rasco
CIO, Americas, HSBC Private Bank and Premier Wealth
Highlights: The Federal Reserve unanimously raised the federal funds target range by 25bps to 3.75 per cent–4.00 per cent, its first rate hike since July 2023, as higher energy prices have forced the Fed’s hand to tighten in an effort to control any further inflationary escalation. The Fed’s median projection, in the Summary of Economic Projections (SEP), points to one additional 25bps hike this year, while inflation is expected to return to the target of 2 per cent much more gradually by 2029.
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From an investment perspective, we expect the US dollar to remain broadly supported, particularly against the euro and sterling; we maintain a neutral fixed-income stance with an active, medium-duration and income-focused approach; and we remain constructive on US equities, supported by continued AI investment, resilient earnings and broader market participation
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The Fed raised its 2026 and 2027 growth forecasts, lowered its unemployment projections and modestly increased its inflation forecasts for 2026. The Fed’s median projection implies one additional 25bps hike in 2026 and no net change in rates during 2027. We similarly expect one further 25bps hike in December and then rates to remain at 4.00 per cent–4.25 per cent throughout 2027. Markets, meanwhile, are pricing a somewhat higher path, with roughly 30bps of additional tightening by year-end and around another 50bps through the second half of 2027, before some easing is priced for later on
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The September statement placed greater emphasis on economic resilience and returning inflation to target. The Fed added that “domestic spending has been resilient,” broadened its reference from the Middle East conflict to “geopolitical developments,” and removed July’s explanation that supply shocks, including energy, were contributing to inflation. It instead said the rate increase would support a “timelier return” to the 2 per cent goal. Fed Chair Warsh reinforced the inflation message but avoided committing to the next move. He described the economy as strengthening, the labour market as around full employment and financial conditions as difficult to characterise as restrictive. At the same time, he said inflation remains too high and underlying trends have not improved sufficiently
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The Q&A reinforced a trends-based policy framework. Warsh said stronger economic activity, the insufficient decline in inflation, and a changed geopolitical backdrop helped drive the September decision. He also stressed that the Fed does not need to deliberately weaken the labour market to restore price stability. He attributed the higher long-term yields partly to stronger growth, greater competition for capital from hyperscaler financing and geopolitical uncertainty. He also highlighted AI as an important influence on both the demand and supply sides of the economy
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