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The US Federal Reserve (Fed) raised rates by 25 basis points on Wednesday, taking the Fed funds rate to 3.75% to 4%. This was the first-rate hike since July 2023, and while the unanimous vote was expected, the Fed’s tone was not.
Fed Chair Kevin Warsh told reporters that inflation had been too high for too long and the Fed was removing a dose of accommodation (Fed speak for reducing monetary stimulus). The Summary of Economic Projections showed that 16 of the 18 submitting officials expect at least one further hike this year, and futures now price in close to a 90% probability of that move, while the US 10-year Treasury yield holds near 5%, a level last reached in 2007.
The more hawkish rhetoric will undoubtedly disappoint the man who appointed Warsh to his current position, US President Donald Trump. Trump has made no secret of his desire for lower rates and responded to this week’s decision by calling for rates in the US of 1% or less.
What makes the decision hawkish is the nature of the inflation being targeted. Much of the inflationary pressure stems from energy prices linked to the US-Iran conflict, which Warsh conceded monetary policy has no control over. So, the Fed is tightening not with the expectation that higher rates will lower the oil price, but because US inflation sitting above target for five years needs to be addressed.
MARKET MOVES
Bonds
The 10-year US Treasury yield eased to around 4.94% at Thursday’s close, down roughly five basis points, after spiking above 5% in the immediate wake of the hike (an intra-week peak near 5.04%, the highest level in close to two decades). The move lower is a pullback from the top of the range but is not a trend reversal because the curve is repricing a higher-for-longer hawkish Fed, and the day’s relief came largely from softer oil rather than any dovish signal.
Germany’s 10-year Bund closed near 3.48%, down about three basis points, having recently touched roughly 3.55% – its firmest level since 2009. The move mirrors the fall in US bond yields and the second consecutive session of easing oil prices. The European Central Bank (ECB) Governing Council raised the deposit rate by 25 basis points to 2.50% on 10 September, leaning against Iran-war-driven energy inflation. Bunds remain the eurozone’s anchor, and at these levels they signal a market braced for sticky inflation and further ECB tightening rather than a concern over falling growth.
The United Kingdom’s (UK’s) gilts outperformed this week, with the 10-year yield dropping around 11 basis points to about 5.24%. The rally reflects the Bank of England’s (BoE’s) decision to hold the Bank Rate at 3.75% in a six-to-three vote, combined with a six-month pause in active quantitative-tightening gilt sales. Gilt yields are off their recent near-two-decade highs but still elevated, underlining that the BoE is balancing above-target inflation against a fragile growth backdrop.
Equities
Wall Street staged a broad rebound at Thursday’s close, recovering ground lost in the initial reaction to the Fed’s hawkish outlook. The S&P 500 rose 1.14% to 7,638.16, the Dow Jones Industrial Average added 0.61% to 51,778.04, and the NASDAQ Composite jumped 1.69% to 26,418.30, with the NASDAQ 100 up 1.73%. Semiconductors and mega-cap technology led the bounce, helped by easing yields and constructive chip-demand commentary. The S&P 500 set an all-time high near 7,799 earlier in 2026 on rate-cut hopes, so Thursday’s close is roughly 2% below the record.
The Euro Stoxx 50 closed firmly higher, up around 0.9% near 6,322, on Thursday, riding the global risk-on tone and the relief from softer oil and gas prices, which temper the region’s inflation anxieties. European equities have been resilient through the rate-repricing, but indices remain sensitive to any renewed move higher in energy or core-eurozone yields.
The FTSE 100 was a strong performer on Thursday, gaining about 1.19% to roughly 10,816, supported by the same global rebound and by the BoE’s steady hand. The index’s heavy weighting toward commodities and internationally-exposed earners means firm oil and a softer pound can both boost investor sentiment, and the gilt rally provided an additional tailwind for rate-sensitive sectors.
Commodities
Spot gold is trading at roughly $4,352/ounce. The metal is consolidating below its earlier 2026 record and is down on the month, a clear reflection of the hawkish Fed as a stronger dollar and higher real yields are the classic headwind for non-yielding gold. Offsetting that is a genuine safe-haven demand due to US-Iran tensions, which has minimised any pullback from bullion.
Brent crude is around $104/barrel and West Texas Intermediate is near $101/barrel, both easing modestly – roughly 1.6% and 0.5% respectively – after a strong run. The pullback reflects some relief on supply as Saudi pipeline capacity was restored, but the bigger picture is that both benchmarks sit near multi-year highs, up sharply on the month, on fears around the Strait of Hormuz and broader US-Iran escalation. Elevated crude prices are the awkward complication for every central bank, as they are feeding the inflation pressure.
Currencies
The US Dollar Index is holding around 100.2, near its firmest level in roughly seven weeks. The hike and the hawkish projections have widened the dollar’s rate advantage. With today’s light data calendar, the greenback’s near-term direction rests on upcoming data releases, Fed commentary and any repricing of the Fed’s projected December rate decision.
The euro is trading near $1.148/€, close to its weakest level since late July and down on the month, with the interest rate differential working in the dollar’s favour. While the ECB also hiked rates in September by 25 basis points to 2.50%, it still sits far below the Fed’s fed rate of 3.75% to 4%, and the Fed’s hawkish projections have widened the differential further, pushing the euro toward multi-week lows.
Sterling is hovering around $1.335/£, also near its softest level since late July. The BoE’s decision to hold while the Fed hiked has moved the rate differential against the pound in the near term, even though above-target UK inflation keeps a future BoE hike on the table.
*Please note that all information is at the time of writing.
Key indicators:
GBP/USD: 1.3353
GBP/EUR: 1.1623
GBP/ZAR: 21.72
BRENT CRUDE: $102.23
GOLD: $4,393.63
Sources: Bloomberg, Business Day, CNBC and Statistics South Africa.
Written by Citadel Global Managing Director, Bianca Botes.
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