Investment Event

The Fed is likely to keep interest rates higher for longer as resilient but uneven growth, AI investment and geopolitical supply shocks sustain upside inflation risks.

• The FOMC unanimously raised the funds rate by 25bp in September 2026, seeking to restore inflation-fighting credibility after more than five years of above-target inflation.
• The Fed's projections lifted 2026 GDP growth to 2.3% from 2.2% in June and put core PCE inflation at 3.4% in 2026, declining to 2.5% in 2027 and 2.2% in 2028.
• Twelve of 18 FOMC members expect one further hike after September, four expect two more and only two expect no additional tightening in 2026; most see rates at 4.00%-4.50% in 2027.
• The economy is described as K-shaped: AI-related investment and wealthier consumers are supporting demand, while a low-hire, low-fire labour market and weaker consumers and businesses remain vulnerable to higher rates and supply shocks.
• HSBC considers two to three hikes in total, including September's move, a sensible middle ground, while markets price four hikes in total; a further 100bp would leave rates about 150bp above the Fed's estimated neutral level.

Takeaway: Higher-for-longer rates make 10-year US Treasury yields near 5% a potentially attractive source of income but a less reliable hedge, so investors should diversify across public and private credit, emerging markets and alternatives while favouring broader equity-market exposure outside the US.