A wave of risk aversion swept through financial markets on Tuesday, as a long-awaited Federal Reserve rate hike delivered a shock to investor sentiment.
At 2 a.m. Beijing time, the Federal Reserve announced a 25-basis-point increase to its federal funds rate target range, lifting the benchmark rate from 3.50% to 3.75% up to 3.75% to 4.00%.
This marks the Fed's first rate hike in over three years, a move not seen since July 2023. In its policy statement, the central bank cited stubborn inflationary pressures and persistently high global energy prices driven by geopolitical conflicts as key factors, noting that current monetary policy remains insufficient to bring inflation back down to its 2% target. Recent rises in energy prices and higher U.S. Treasury yields have placed significant pressure on the Fed, intensifying market expectations for further tightening.
The Fed's economic projections released on the same day showed officials slightly raising their forecasts for both inflation and economic growth this year, while the median projection for the unemployment rate was trimmed to 4.1% from 4.3% in June. The median forecast for the federal funds rate this year was lifted to 4.1% from 3.8% in June, with projections for both 2027 and 2028 also raised by 50 basis points.
Speaking after the decision, Fed Chair Warsh emphasized that the central bank's primary focus remains price stability, noting that U.S. inflation remains elevated and has persisted for too long. "We cannot influence oil or food prices, but what we can do, and what we will do, is ensure that these price increases do not become entrenched," Warsh said.
The Fed's dot plot revealed that 12 of 18 officials project at least one more 25-basis-point hike this year, four see two additional hikes, and just two expect no further moves. Looking further out, eight officials anticipate one rate hike in 2027, six project rates to hold steady for the entire year, three foresee two cuts, and one official expects four cuts.
President Trump's sharp response came swiftly. In a post on his Truth Social platform, Trump argued that U.S. interest rates should be lowered to 1% or below, "because the United States has the best credit in the world." He added, "Lower rates, and fast!"
White House spokesman Kush Desai, speaking on Fox News, reiterated that President Trump's stance on rates is abundantly clear, and that the Fed's decision to hike appears to lack convincing economic justification. Desai argued that current inflation stems entirely from energy supply shocks related to the Middle East conflict, bearing no relation to interest rates. He warned that higher rates would push up mortgage costs, directly pressure American consumers, and potentially constrain business investment and economic expansion.
Nick Timiraos, the Wall Street Journal reporter often dubbed the "Fed whisperer," noted that the unanimous decision to raise rates effectively undermined the White House's narrative that inflation is not a concern. He highlighted that most officials now expect one more hike this year, with energy price shocks and an AI investment boom reshaping the inflation outlook.
Following the Fed's move, central banks in Saudi Arabia, the UAE, Qatar, Bahrain, and Oman all announced 25-basis-point rate hikes. Brazil, conversely, cut its benchmark lending rate by 25 basis points to 13.75%.
Trading activity intensified after Warsh's comments, with traders increasing bets on two more rate hikes by year-end. Market-based probabilities suggest roughly a 50% chance of another hike in October. According to CME's FedWatch tool, the probability of rates holding steady at 3.75%-4.00% after the September meeting stands at 50.2%, while the odds of a 25-basis-point hike are 49.8%.
Global Market Tumult: Turkish Circuit Breaker, US Stocks Slide, Gold and Oil Plunge
Turkish markets were thrown into chaos on Monday evening, with the main stock index suffering a sharp decline that triggered a full-market circuit breaker. The Istanbul Stock Exchange 100 index fell as much as 6% intraday, prompting the exchange to halt trading across the entire market. This decline extends a two-day losing streak for the benchmark and could mark the steepest two-day drop since February 2023.
The immediate trigger for the rout was reported to be a default by some funds managed by Turkish asset manager Pusula Portföy, which failed to meet investor redemption requests. This raised broader concerns about liquidity pressures within Turkey's investment fund industry. Earlier in August, Turkey's Capital Markets Board had tightened restrictions on hedge fund investments, limiting the proportion of a fund's holdings in a single company's stock to curb excessive concentration. Market participants now worry that funds heavily concentrated in illiquid stocks could face forced selling under the new rules.
On Wall Street, the three major indices opened slightly higher ahead of the Fed announcement, only to turn sharply lower afterward. By the close, the Dow Jones Industrial Average had fallen 1.21% to its lowest closing level since mid-June. The S&P 500 declined 0.44%, while the Nasdaq Composite inched down 0.01%.
Commodity markets also saw significant moves. International oil prices dropped substantially, and both gold and silver prices took a dive following the Fed's decision.
Assessing the Commodity Fallout
Commenting on the implications for commodities, Wu Zijie, a precious metals analyst at Jinrui Futures, noted that the rate hike itself was largely priced into the market. What mattered more, he said, was the latest dot plot, the policy statement, and Warsh's signals on the future path of rates.
Wu observed that markets have now priced in up to two more hikes this year and as many as four within the next twelve months. He added that Warsh's refusal to provide forward guidance on the rate path, and his failure to strongly signal consecutive hikes, could lead to a temporary release of pressure that had been building from higher USD and Treasury yields. This, he suggested, leaves room for valuation recovery in both precious and industrial metals.
On crude oil, Wu noted that rising oil prices have been a major force driving up inflation and rate-hike expectations. In the short term, however, oil prices will depend more heavily on developments in the Middle East. Yang Yuanyuan, a chemical industry researcher at JLC, argued that Warsh's relatively neutral tone is positive for commodities and the chemical sector. Looking further ahead, she said Middle East tensions will continue to dominate chemical pricing trends.
Wu added historical context, pointing out that rate hikes do not always correspond to commodity bear markets. "For example, Greenspan's preemptive hike in 1997 was followed by markets discounting the bad news. During 2004-2006, when the Fed hiked rates 17 times consecutively, strong global demand growth and supply constraints still pushed metal prices significantly higher. In contrast, the 2022 hiking cycle clearly suppressed commodity valuations through a stronger dollar and higher real rates. The key determinant of commodity price trends remains how actual hikes compare to market expectations, as well as the relative strength between monetary tightening and physical supply-demand cycles."
Cheng Wei, a macro researcher at Zhongsheng Futures, highlighted the broader market turmoil, noting that a sharp sell-off in global tech stocks is fueling concerns about an AI bubble burst. With pessimistic sentiment spreading, precious metals have been treated as a liquid asset to raise cash, leading to systemic selling. He added that regulatory voices supporting market stability, alongside share-buyback announcements from multiple state-owned enterprises and listed companies, have provided liquidity support and helped A-share tech sectors recover, with precious metals also seeing oversold bounces.
Looking ahead, Cheng pointed to persistent uncertainty in the Middle East. Despite signs of de-escalation, he said the significant divergence in core demands between the parties leaves only room for limited concessions, making a comprehensive agreement difficult. The risk of negotiations collapsing and conflict escalating once more remains on the table. Threats from the Houthis to impose a maritime blockade on Saudi Arabia, alongside concerns about another closure of the Strait of Hormuz, are intensifying worries about potential disruptions to oil supply.
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