Financial markets are convinced the Federal Reserve will raise interest rates on Wednesday, and economists expect the move to be followed by further increases in October and December. Analysts are already flagging where the tightening could bite hardest — from AI-fueled capital spending to the insurance sector's exposure to private credit.
Financial markets are convinced the Federal Reserve will raise interest rates on Wednesday. Futures already priced an 86% probability of the move. But the bigger question for economists is not whether the Fed moves once — it's how many times.
BMO and Vanguard see more hikes ahead
Ian Lyngen, head of U.S. rates strategy at BMO Capital Markets, expects a quarter-point hike this month to be followed by similar increases at the Fed's October and December meetings. That path would reverse the rate cuts former Chairman Jerome Powell pushed through in 2025 and lift the Fed's benchmark rate to a range of 4.25% to 4.5%.
Josh Hirt, senior U.S. economist at Vanguard, said three hikes looks like a reasonable starting point, though he put the range of possible outcomes at one to six moves. JPMorgan, meanwhile, now expects the Fed to hike in both September and December.
Where the tightening could bite
Derek Tang, a policy economist at Monetary Policy Analytics, pointed to two areas of vulnerability: the optimism driving AI spending and the insurance sector's private-credit holdings. According to Monetary Policy Analytics' Derek Tang: "Those are a few things I think people should pay more attention to."
Ruchir Sharma, chair of Rockefeller International, wrote in the Financial Times that he worried higher borrowing costs might short-circuit the AI boom, since Big Tech firms competing against a government bond yielding 5% could be crowded out of debt markets. Charlie Ripley, senior portfolio manager at Allianz Investment Management, agreed a 5% yield on the 10-year Treasury could tip the market into a selloff. He pointed to AI hyperscalers, estimating they could need $1 trillion in capital expenditures annually over the next few years.
The International Monetary Fund has separately warned about the opaque nature of insurance companies partly or fully owned by private-equity firms, which have been investing in riskier fixed-income assets. Losses tied to interest-rate volatility could spill over into the banking sector.
A different kind of cycle
Vanguard's Hirt said this potential cycle differs from the ones that preceded past crises, such as the 2023 collapse of Silicon Valley Bank or the 1994 municipal bankruptcy in Orange County, California. The Fed already ran a significant rate hike cycle between 2022 and 2024, he said, and rates remain elevated — meaning this move would not represent a sudden shift for markets. The goal, as he described it, is finding a level of rates that puts downward pressure on inflation, not reversing course.
History offers one exception to the pattern of repeated hikes: in 1997, the Fed raised rates once and then held for 18 months before cutting.
Sources: MarketWatch, InvestingLive (snippet-based)
Trading involves risk.
Risk Disclaimer
