US Fed builds credibility, but hawkish turn leaves investors edgy

Investors are gaining more confidence in the Federal Reserve’s inflation-fighting backbone, but uncertainty about how far it will raise interest rates to keep prices in check is likely to cause volatility for stocks and bonds in the weeks ahead. The US central bank on Wednesday raised rates for the first time since 2023, a widely expected move as it seeks to address persistently above-target inflation, despite repeated public calls by President Donald Trump for rate cuts. But markets now confront a very different investment backdrop, including a lack of clarity about how tight the Fed will now seek to make monetary policy. In the face of higher rates, some investors said it could make rate-sensitive assets, such as small-cap stocks, less attractive. The meeting “does make them look independent … it adds trust to the market”, said Matthew Miskin, co-chief investment strategist at Manulife John Hancock Investments. Yet the Fed “may have come off a little too hawkish in this meeting and we’re just going to have to see how the economy can react in the next couple of months”, he said. Many investors saw the meeting as a test of independence for new Fed chair Kevin Warsh, who was picked