The Fed has raised its benchmark interest rates for the first time since July 2023. With inflation still high and the resumption of hostilities in the Middle East pushing oil prices back towards record highs, a rapid decline in inflation now seems unlikely. This made the decision inevitable. Will the Fed stop there? We do not think so.
A Rate Hike Linked to the Resumption of Fighting
The Fed has just set the target range for its main benchmark interest rate at 3.75% to 4.0%, 0.25 percentage points higher than before. Its assessment of the US economic situation is clear: the US economy is doing well. Employment is holding up. Inflation is too high and has remained so for too long. The Fed therefore unanimously decided to raise rates this week.
This decision had become widely expected over time. In August, with Brent WTI crude trading at around USD 80 a barrel, keeping monetary policy unchanged was still conceivable, particularly as the White House was suggesting that peace in the Middle East could soon be achieved, which would bring energy prices down.
With fighting resuming and oil prices rising above USD 100 a barrel, that scenario was no longer sustainable. Markets therefore changed their expectations regarding the possibility of a rate hike, and the Fed has now shown that they were right.
The Market Is Expecting Up to Three More Rate Hikes
Beyond the rate hike itself, market participants were mainly questioning the future path of benchmark interest rates. Some were referring to a precautionary rate hike, which would allow the Fed to maintain its credibility while keeping rates unchanged afterwards. This is how markets initially interpreted the decision.
But Kevin Warsh's comments — he was appointed by Donald Trump himself with the aim of lowering benchmark interest rates — quickly disappointed them. He referred to the need to limit an accommodative monetary policy, while at the same time refusing to commit either to future forecasts or to the level at which he believes the neutral rate would stand, allowing the economy to continue on its path without monetary policy being either accommodative or restrictive.
Markets decided to fill this gap themselves: the two-year rate — which attempts to anticipate the evolution of benchmark interest rates without being overly concerned about variables that weigh on the longer term, such as solvency and deficits — has now reached 4.7%.
Starting from a rate currently within the 3.75% to 4.0% range, this suggests that the market is expecting up to three further rate hikes.
A Rapidly Changing Scenario
Such a scenario of repeated rate hikes, which few would have anticipated just a few months ago, is naturally concerning for investors. They started the year expecting cheaper credit, which should have supported an acceleration in investment and consumer spending.
The scenario is now quite different: more expensive credit, investment projects that need to be reconsidered and higher break-even points. This is bound to weigh on business confidence.
The same applies to households and their ability to continue spending and investing, thereby supporting the economy. This will also weigh on companies' revenues and profitability and force investors to reassess their valuations.
Investment in AI, which has supported the US economy in recent quarters, is clearly under threat. It is clearly no coincidence that the giants of artificial intelligence — which are investing hundreds of billions of USD in infrastructure — have suddenly become concerned about the future of humanity.
There is undoubtedly an element of growing awareness. But there is certainly also the fact that these investments are costing them far too much, while their profitability is increasingly questionable given the fierce competition in which they are engaged.
The United States Has the Means to Hold Up…
These prospects are therefore hardly encouraging for either investors or the White House, and their impact will be global. The Fed beginning a new cycle of rate hikes is no small matter.
The repercussions will be felt almost everywhere. And this is where the problem lies: some may conclude that, faced with rising US interest rates, they should leave the US market because it will suffer.
But let us be clear: as the Fed points out, the US economy is doing relatively well, supported in particular by the tax reform promoted by Donald Trump, which continues to bear fruit.
Of course, the economy could perform even better without a war in the Middle East and without tariffs, both of which are contributing to keeping inflation at excessively high levels. But fundamentally, the US economy remains solid and has the means to withstand more expensive credit.
Figures published this week confirm this: US household income reached a new record in 2025. The median household earns USD 87,460 a year, or just over EUR 76,000. They therefore retain the means to spend. And at such levels, Europeans are far behind.
…But Not Necessarily Other Economies
More fragile economies, such as most European economies, will have a much harder time coping. Highly indebted and facing increasingly expensive financing on debt markets, they will quickly come under pressure to put their public finances in order.
This promises a period of austerity and social conflict that will do little to improve the confidence of households and investors.
In such a delicate economic environment, investors have every interest in favouring robust markets with solid fundamentals and/or those offering attractive strengths and growth dynamics.
Conclusion
More than a simple rate hike, a new cycle of rising interest rates is now expected in the United States. This development will have a global impact, and the country is clearly better prepared for it than others that are already considerably weakened.
Our investment strategy in the United States is not being called into question because the economy remains solid and households have the means to continue spending. However, our portfolios are evolving here and there as we advocate greater caution.
Norwegian bonds have been included in all our portfolios for several months. More recently, Swiss equities have begun to feature in our defensive portfolio.
We also continue to invest in other markets of the future that we consider promising and to advocate portfolio diversification, which remains the best way to invest while limiting risk.