In a move that was widely expected by the markets, the Fed raised interest rates by a quarter point to the 3.75% – 4% target range on Wednesday this week. The decision was unanimous, indicating that all 12 members of the Fed’s board are concerned about the persistence of sticky inflation.
The hike drew a furious response from US President Donald Trump, who has a strong preference for lower interest rates. The decision, as such, affirms that the Fed remains resolutely independent under new Chairman Kevin Warsh. Warsh described the hike as a “responsible decision,” stating that “inflation is too high and has been for too long”.
Warsh’s comments underline the Fed’s commitment to bringing inflation back to its 2% target and its determination to prevent rising prices from becoming entrenched. Further interest rate increases are expected this year. The CME FedWatch tool shows that the odds of at least one more hike this year have climbed to 88%, up from 66% a week earlier.
US equities markets largely shrugged off the impact of the hike. Early gains on Wednesday proved short-lived as the S&P 500 slipped 0.45% for the day, while the Nasdaq Composite Index declined 0.01%. The Dow Jones Industrial Average slid 1.2%. Yesterday, markets rebounded, with the Nasdaq Composite rallying 1.7%, the S&P 500 climbing more than 1%, and the Dow adding 0.6%.
At the time of writing, the Nasdaq and S&P 500 indices look likely to close slightly up for the week and the Dow Jones Industrial Average a bit down. While stock markets might be expected to fall on the prospect of higher rates because they raise borrowing costs, there are several reasons markets have shrugged off the first Fed hike in three years.
With the conflict in Iran clouding the inflation outlook and the upward pressure this is adding to longer-dated Treasury yields, traders are encouraged that the Fed is taking the challenge seriously. Furthermore, Brent crude oil prices dropped by 1.35% yesterday, fuelling hopes that inflationary pressures might be transient.
In addition, investors still have strong conviction in the AI trade. Big Tech stocks drove markets higher yesterday, partly because of signals that capital spending in AI will not be slowing down any time soon. Big Tech stocks had dipped early in the week after some AI leaders called for a slowdown in the pace of AI development.
Confidence in the underlying resilience of the US economy also played a role, with few signs of a slowdown in consumer spending or the job market. Strong corporate earnings expectations added support, with some investors reading the rate hike as evidence that the economy remains fundamentally sound.
Finally, markets are forward-looking. Given that the rate hike was already heavily priced into futures markets before the Fed’s September meeting, the event eliminated uncertainty. This gave some traders the confidence to buy back into the market after selling in anticipation of a hike.
The US dollar has strengthened by 1.17% for the week against a basket of developed-market peers following the interest rate hike. Attention now turns to the Fed’s next move, the trajectory of oil prices amid the war in the Middle East, and the third-quarter earnings season, which gets underway in mid-October.
“The market’s reaction could be kind of summed up in one word: relief. I think there is a relief that, ‘hey, the Fed is addressing a sticky inflation problem’.”
– Robert Conzo, CEO at The Wealth Alliance
“The plain fact is that inflation is too high and has been for too long. This summer’s inflation readings do not tell me that underlying trends have meaningfully improved.”
– Fed Chairman Kevin Warsh
Global News
- The Fed raised interest rates by 25 basis points on Wednesday, its first increase since 2023, as Warsh said underlying inflation trends had not “meaningfully improved”. Sixteen of 18 policymakers expect at least one further increase this year, while the median end-2026 rate forecast was raised to 4.1% from 3.8%. Inflation is now expected to return to the 2% target only in 2029, reinforcing expectations that US borrowing costs could remain elevated.
- Warsh broke with Trump on interest rates less than four months after taking office, despite being selected in part for his criticism of the Fed’s previously restrictive policy. Warsh had argued that technology-driven productivity gains could support stronger growth without fuelling inflation, but persistent price pressures, compounded by the impact of the war in Iran on energy costs, have changed the outlook. His support for Wednesday’s unanimous rate increase, and another possible hike this year, reinforces the Fed’s independence despite Trump’s repeated calls for rates of 1% or lower.
- Gold rebounded more than 2% to around $4,360 an ounce on Thursday after falling to a near six-week low following the Fed’s rate increase. The recovery came as falling oil prices eased inflation concerns and financial markets stabilised after the initial reaction to the Fed decision. Gold held those gains on Friday morning, despite the prospect of further US rate increases.
- Oil fell for a third day on Friday, with Brent near $104 a barrel, as supply concerns eased and attention shifted to renewed diplomacy around the US-Iran war. Saudi Arabia is seeking to restore about half the capacity of its damaged East-West pipeline within days, while some tankers continue to transit the Strait of Hormuz. Despite the retreat, Brent remains more than 70% higher this year and above $100, reflecting continued uncertainty over regional supply and the course of the conflict.
- Global bonds rallied on Thursday as investors responded positively to the Fed’s tougher stance on inflation and to a retreat in oil prices, easing inflation concerns. The US 10-year Treasury yield fell nine basis points to 4.93%, snapping an eight-day rise after reaching its highest level since 2007, while yields also declined across major European and Asian markets. Lower energy prices provided some relief to bond markets despite the prospect of further US rate increases.
- Foreign holdings of US Treasuries fell by $50.4 billion in July to a nine-month low of $9.25 trillion, Treasury Department data showed on Wednesday, amid concerns over inflation and US fiscal deficits. Japan and China’s reported holdings fell by $12.8 billion and $15.4 billion respectively, although the figures partly reflect changes in bond values rather than outright selling. The decline comes as the US faces growing financing needs and elevated borrowing costs.
- US stocks rebounded strongly on Thursday as falling oil prices eased inflation concerns following an initial negative reaction to the Fed’s rate increase. The S&P 500 gained 1.1%, its biggest rise in six weeks, while the Nasdaq 100 added 1.7% and chipmakers climbed 3.1%.
- The Fed’s rate increase is set to raise borrowing costs for US households already facing elevated prices. Credit card and other variable-rate debt will become more expensive, while 30-year mortgage rates rose to 6.97%, their highest since May 2025, according to a Mortgage Bankers Association survey released on Wednesday. Refinancing applications fell 9% last week, showing how higher financing costs are already weighing on households and the housing market.
- The US war with Iran had cost the Pentagon about $38 billion by 1 August, the Congressional Budget Office (CBO) said on Tuesday, with continued fighting potentially adding $3 billion a month. Energy disruptions from the conflict are expected to lift US inflation and put further upward pressure on Treasury rates, adding to borrowing costs as federal debt exceeds $40 trillion. The CBO estimates headline inflation in early 2027 will be about 0.5 percentage points higher than projected before the war.
- The EU proposed on Wednesday that Canada become its first “associate member,” opening the way for deeper cooperation in trade, critical minerals, defence, energy and AI. Canadian PM Mark Carney welcomed the proposal, but Trump warned on Thursday it could constitute a “hostile act” and threatened “very serious tariffs” on Europe. Trump separately ordered US agencies on Thursday to remove Canadian goods from government contracts, escalating a trade dispute that is pushing Canada towards closer economic ties with Europe.
- The Bank of England held interest rates at 3.75% on Thursday but warned that a hike may be needed if Middle East-driven energy prices continue to fuel inflation, with UK inflation expected to reach about 4% early next year. The Bank of Japan, meanwhile, raised its policy rate by 25 basis points to 1.25% on Friday, its fastest pace of rate increases in 36 years, as persistent inflation pushed it further away from decades of ultra-low rates. However, doubts about the pace of further tightening contributed to a 0.6% decline in the yen to around ¥ 157/$1.
- AI investment is increasingly supporting profits beyond the technology sector, with all eleven S&P 500 sectors expected to deliver earnings growth in the third quarter for the first time since 2021, Bloomberg Intelligence data showed on Wednesday. Record spending on data centres and AI infrastructure is benefiting industries including energy, utilities, financials and industrials. The broadening suggests the benefits of the AI investment boom are spreading across corporate America.
- A widening debate is emerging across the AI industry over whether development of the most advanced models is moving too quickly for safety measures to keep pace. Anthropic CEO Dario Amodei has called for a slowdown, while other industry leaders have advocated greater caution, coordination and stronger safeguards. These include OpenAI CEO Sam Altman and Elon Musk, while Meta CEO Mark Zuckerberg favours independent safety evaluations and Nvidia CEO Jensen Huang supports rigorous testing rather than an industry-wide slowdown. Trump, however, opposes slowing US AI development, arguing that maintaining momentum is critical to competing with China. The debate is also drawing greater government attention, with Senator Mark Warner calling for AI safety standards by year-end.
- Microsoft AI chief Mustafa Suleyman warned on Wednesday that giving AI systems increasingly humanlike characteristics could make them harder to control, challenging Anthropic’s suggestion that its Claude model may have a functional form of emotions or feelings. Suleyman rejected the idea that AI can be conscious and said Microsoft would keep humans in control of its systems. The disagreement highlights another emerging fault line over how increasingly sophisticated AI should be designed and governed.
- SK Hynix is in exploratory talks with Intel to manufacture memory chips in the US for the first time, potentially using part of Intel’s delayed Ohio facility or forming a venture with Intel and major cloud companies. A deal could help Intel use its US manufacturing capacity, expand supplies of memory chips amid surging AI demand, and support Washington’s push to localise semiconductor production. However, South Korean restrictions on sensitive technologies including advanced memory could complicate any agreement.
- Novo Nordisk partnered with Anthropic on Wednesday to use its Claude Science AI platform to accelerate drug research and development, as the Danish drugmaker seeks to strengthen its pipeline amid growing competition from Eli Lilly. The technology will be deployed across Novo’s research operations to shorten development timelines and identify new scientific opportunities. The partnership underscores the pharmaceutical industry’s increasing use of AI to reduce the time and cost of bringing new medicines to market.
- As at Thursday’s close the S&P 500 was 0.25% down for the week.
Local News
- The rand strengthened about 0.6% to R16.31/$ on Thursday, supported by firm commodity prices despite the Fed raising US interest rates and signalling further tightening. Attention now turns to the South African Reserve Bank’s 23 September meeting, where policymakers face the challenge of containing inflation while higher interest rates risk adding pressure to already subdued domestic economic activity.
- US-South Africa tensions escalated this week after Secretary of State Marco Rubio imposed visa restrictions on South Africans who the US says are involved in race-based discrimination, uncompensated land seizures or incitement to violence. Pretoria rejected Washington’s characterisation of its policies, saying they seek to address historical racial injustice and would not be changed under US pressure. US Ambassador Leo Brent Bozell warned that further measures could follow, raising the risk of broader economic and diplomatic consequences.
- The ANC lost its bid to reinstate 181 candidates on Wednesday after the Electoral Court dismissed its appeal over candidate exclusions ahead of the November 4 local elections. The ruling leaves the party unable to contest Port St Johns and Ngquza Hill and without proportional representation lists in several other municipalities, although the ANC plans to appeal further. Separately, the Independent Electoral Commission identified 550 duplicate nominations involving candidates listed by more than one party as it finalised candidate lists for the elections.
- A permanent fiscal anchor is being prepared to constrain government spending and borrowing and protect South Africa’s recent fiscal gains. National Treasury DG Duncan Pieterse said on Monday that legislation has been drafted, with details due in the 21 October Medium-Term Budget Policy Statement. South Africa is on track for a fourth consecutive primary budget surplus, while greater fiscal credibility could help reduce borrowing costs and risk premiums, supporting longer-term growth.
- National Treasury will launch a three-year intervention with the Development Bank of Southern Africa and other institutions to stabilise Johannesburg, Finance Minister Enoch Godongwana said on Monday. The programme will continue regardless of who governs the city after the 4 November elections, following earlier failed attempts at a turnaround. Political instability and financial mismanagement have left Johannesburg struggling to pay bills and deliver reliable services. The city accounts for about 15% of South Africa’s economic output, making its recovery important to the broader growth outlook.
- Mining has regained a dominant position on the JSE, with resources now accounting for more than 30% of the All Share Index, roughly triple their weighting a decade ago, as higher gold and platinum-group metal prices lift valuations. Four miners are now among the JSE’s ten largest companies, with Gold Fields overtaking Naspers as the biggest by market value on Wednesday. The resurgence has been driven mainly by higher commodity prices rather than increased production, with supply constraints continuing to support PGM prices.
- SAA Technical is seeking buyers for more than 40,000 excess aircraft spares after SAA reduced its fleet and major customers Mango and Comair ceased operations, it said on Wednesday. The state-owned maintenance company has received disclaimed audits for six consecutive years and is investigating an alleged syndicate accused of stealing and selling aircraft components. The disposal highlights the operational and governance challenges facing the business as it seeks to rebuild.
- The Prudential Authority fined Capitec Bank R28 million on Monday for deficiencies in its anti-money-laundering controls identified during a 2023 inspection, including inadequate customer due diligence, employee training and risk-management processes. The penalty follows a R56 million fine imposed on Capitec in 2024 for separate Financial Intelligence Centre Act compliance failures. The latest action highlights continued regulatory scrutiny of banks’ financial-crime controls following South Africa’s removal from the Financial Action Task Force greylist last year.
- Pan African Resources more than doubled profit to $356.9 million in the year to June as higher gold production and prices drove headline earnings per share up nearly 200%. The miner moved from net debt of $150.5 million a year earlier to net cash of $185.8 million and proposed a record final dividend alongside a R500 million share buyback, it said on Wednesday. Production is expected to increase further in the year ahead, although rising electricity and other input costs are expected to push production costs higher.
- Coronation Asset Management cut its stake in SPAR from 5.06% to just 0.17% on Thursday, having held 10.89% as recently as August, as the retailer grapples with falling shares and leadership upheaval. The SPAR Guild, which represents independent retailers, has backed former Nampak CEO Phil Roux as the next chair following recent board departures. SPAR and the Guild have committed to rebuilding their relationship after months of conflict.
- As at the time of writing, the rand was 1% weaker against the dollar, and the ALSI was 0.9% down for the week.
Sources: Dynasty, Business Day, Bloomberg, Reuters, Moneyweb, NYT, etc.
