Fed Hikes Interest Rates for First Time Since 2023 Amid Inflation Fight

The Federal Reserve has hiked interest rates for the first time since 2023, joining its peers in a move to combat inflation. The unanimous decision is seen as a sign of the central bank's independence from political pressure. This development comes on the back of recent economic data prints, including a pick-up in job creation and inflation over the summer, and a sharp rebound in oil prices due to the re-escalation of the Middle East conflict.

The Fed expects two more hikes by June 2027, driven by robust growth amid strong AI investments and a tight labour market. This pivot is expected to help the Fed rebuild its credibility as an inflation fighter. However, the updated policy rate estimates are lower compared with money market pricing of three more rate hikes by June 2027.

The Bank of Japan also hiked rates this week, marking the first time all three major central banks, Fed, ECB and BoJ, have hiked in the same month. The BoJ's moderately hawkish pivot is expected to curb rising domestic wage-driven inflation pressure.