Fidelity International’s Global Head of Macro and Strategic Asset Allocation, Salman Ahmed, stated that the Federal Reserve’s decision to raise interest rates by 25 basis points aligned with broad market expectations. The more significant takeaway from this decision is that the Fed's policy reaction function is gradually becoming clearer. Notably, the fact that the decision was approved unanimously adds particular weight to this signal.

Fidelity’s baseline assumption remains intact, projecting three to four rate hikes this cycle rather than a one-off adjustment. However, this view is contingent on the persistence of the AI capital expenditure cycle. The firm added that, at this stage, the Fed has resumed its rate-hike cycle, with a unified committee stance and a dot plot indicating that this cycle is not yet complete.

More importantly, the Fed now forecasts inflation will remain above target for a longer period, which aligns with Fidelity’s structural inflation framework adopted in its capital market assumptions. While the policy path will continue to depend on incoming data, Fidelity believes that if the AI investment cycle stays robust and inflation remains elevated, the current tightening cycle could extend further.

The reaction in long-term bond markets is also worth noting. Despite the rate hike and a hawkish dot plot, long-term bond yields have actually declined, which is a favorable development, though it is premature to draw definitive conclusions about the Fed’s policy credibility. At minimum, the market has not interpreted this meeting as a signal of rising long-term inflation risks. The real question remains how far this rate-hike cycle will ultimately go.