Global markets spent the end of the week absorbing the Federal Reserve’s first interest rate increase since 2023, and the initial reaction has been a partial retreat from the dollar and bond yields. The Fed raised its target range to 3.75% to 4% on Wednesday, and its projections showed 16 of 18 policymakers expecting at least one more quarter-point hike before the end of the year, putting the median endpoint at 4% to 4.25%.
Chair Kevin Warsh, who took office in May after being nominated by President Trump, delivered what traders read as a hawkish message. The Fed also raised its 2026 inflation forecast to 3.7% from 3.6% while lifting its GDP growth estimate to 2.3%, a combination that signals the committee sees the economy strong enough to absorb tighter policy while inflation stays above target.
Markets walk back the extremes
Stocks spent the week under pressure before finding footing on Friday. The Dow posted its third straight losing week, sliding 1.7% for its worst performance since March, while the S&P 500 ended the week down about 0.1% and the tech-heavy Nasdaq gained 0.7%. Friday’s session saw the S&P 500 rise 0.2% even as the 10-year Treasury yield climbed near 5%, with the majority of stocks falling as the squeeze between higher yields and resilient mega-caps continued. Two-year yields moved to their highest levels in two years as traders priced the follow-up hikes the Fed’s projections imply.
The dollar, which had hit a seven-week high, took a breather against major peers as Treasury yields retreated from the highs of Wednesday and Thursday. That retracement helped gold, which climbed more than 1% on Thursday to around $4,312 per ounce after touching a near six-week low following the decision. Oil held a geopolitical premium, with WTI near $101 and Brent around $105 a barrel, after Saudi Arabia moved to reroute exports through Oman and the US said a damaged Saudi export pipeline would reopen within days, pulling prices back from multi-month highs earlier in the week.
What the Fed signaled
The September decision was the Fed’s first hike in three years, reversing part of the 2025 cutting cycle. Prediction markets moved quickly to price the next step. Polymarket traders favored a pause in October, with no change priced at 64%, and put another quarter-point increase at 67% for December. Goldman Sachs became one of the first major banks to forecast consecutive hikes, calling for another increase in October, and RBC Economics expects the Fed funds range to reach 4.25% to 4.5% by the end of 2026 before the central bank pauses again.
The inflation picture explains the urgency. Resurging oil prices, driven partly by Middle East supply disruptions and a war that began in February, have raised fears that central banks worldwide will have to keep tightening. The Fed’s own statement emphasized that inflation remains elevated, and Warsh’s press conference reinforced the signal that the committee prefers to over-deliver on price stability rather than risk a repeat of the lag that followed the 2021-2022 inflation surge.
The bond market’s wider message
The Fed is not the only central bank moving. The Bank of Japan raised rates to 1.25% on Friday, the highest since 1995, but the yen still fell as markets read the move as measured rather than aggressive, with USD/JPY hovering near 156. The Bank of England and the European Central Bank both held rates unchanged on Thursday, with the ECB’s decision landing against a backdrop of a French budget stalemate that has pushed the OAT-Bund spread near 100 basis points, levels last seen in the 2012 euro crisis. French 10-year yields have pushed past 4.5% for the first time since 2008, and Prime Minister Sebastien Lecornu is still trying to negotiate spending cuts for a budget aimed at a deficit that ran 5.1% of GDP last year.
That divergence matters for the dollar. A Fed that hikes while the ECB holds and the BoJ moves slowly tends to pull capital toward US assets, supporting the dollar and, historically, pressuring risk assets including crypto. Bitcoin traded near $79,000 to $80,000 through the week, holding most of its recent gains despite the hawkish turn, and some analysts noted the asset’s improving correlation with gold rather than tech stocks as a sign the narrative is shifting toward a store-of-value framing rather than a high-beta trade.
The political overlay
Policy is not the only variable. The White House has publicly pressed Warsh’s central bank as rate expectations climb, and Treasury Secretary Scott Bessent has been vocal about bond market conditions, with interest payments on US debt now running about $1.25 trillion a year. Lawmakers also passed a sweeping Russia sanctions bill this week giving the president new tariff powers over countries buying Russian oil, a tool that could move energy markets again if used. Each of these adds noise to a rate path that the Fed itself has just made more aggressive.
What to watch next
The calendar offers little relief. The next CPI print will land with core inflation still above the Fed’s target, and the October FOMC meeting is now the first test of whether the pause-then-hike path holds. Jobless claims and payroll revisions will matter as much as inflation data, since the Fed’s own GDP upgrade implies it does not expect labor-market weakness to force a stop.
For now, markets have settled into a pattern of higher-for-longer rates, a strong dollar and a cautious risk tone. The week’s pullback in yields and the dollar looks like a pause in that trend rather than a reversal, and December’s pricing at 67% for another hike suggests investors are taking the Fed’s projections at their word. The next surprise, if it comes, will more likely be a dovish one than a hawkish one, given how fully the market has already priced the hawkish path.