The Federal Reserve (Fed) raised the benchmark rate by 25 basis points, to a range of 3.75% – 4.00%, in its first hike since 2023. The decision was approved by a vote of 12 to 0, justified by a booming economy and inflation above the 2% target. In the projection chart, 16 of the 18 participants expect another rate hike before the end of the year, four of them anticipate two, and only two believe the cycle should end here. The data supported this assessment: August retail sales climbed 1.2% month-over-month, the largest increase in five months and well above the expected 0.8%, with the control group rising 1.4% versus an estimate of 0.5%. Industrial production, however, remained flat against a consensus forecast of 0.3%, with manufacturing declining 0.3%. Unemployment insurance claims fell to 196,000, the lowest level since July, while housing starts declined by 2.6% and building permits by 2.7%.

In the markets, the spike in yields was the main focus: the 10-year Treasury yield briefly surpassed 5% for the first time in nearly three years, and the 2-year yield hit its highest level since mid-2024. Stocks rose initially following the decision but reversed course when the market interpreted Kevin Warsh’s comments as hawkish: the S&P 500 closed Wednesday at its lowest level since July, and the Dow Jones lost 1.2%. The dollar strengthened broadly, and the VIX fell to 15.31 from 15.84.