Why this Fed hiking cycle may not matter

The current Fed hiking cycle is more likely to affect market volatility and pricing than materially change the medium-term inflation or growth outlook.

• The Federal Reserve raised rates for the first time since 2023, while inflation remains above target and markets are pricing four hikes.
• Core CPI surprised to the upside in August but has continued to normalize, with renewed inflation concerns driven mainly by energy and geopolitical disruption rather than broad domestic demand.
• A quarter-point move, or even a small sequence of hikes, is unlikely to materially affect oil prices; curbing supply-driven inflation would require a tightening cycle severe enough to cause a broader slowdown, which is not the base case.
• The economy is less rate-sensitive than during the post-global-financial-crisis period because nominal growth is firmer, public-sector leverage is supporting activity, corporate balance sheets are not broadly retrenching and AI-related investment is sustaining capital expenditure.
• Broad financial conditions remain as loose as at any point this century, while fiscal policy, AI investment and resilient consumers could allow the economy to withstand several additional hikes.

Takeaway: Investors should expect the Fed to generate volatility even if modest tightening does not break the macroeconomic backdrop, making dynamic duration management relevant; weakness caused by rate fears could become an opportunity if energy inflation fades, although a broadening into wages and core services or a much higher terminal rate would invalidate this view.