What were the key developments and risks for global financial markets ahead of the Federal Reserve’s expected first interest-rate hike since 2023—including the performance of major equity markets, the probability and rationale for a 25-basis-point increase, the effects of surging

Ahead of the September 16 decision, markets were pricing an almost fully expected 25-basis-point Fed increase—the first since 2023—to 3.75%–4.00%. The immediate risk was not the quarter-point move itself, but whether Chair Kevin Warsh would signal further tightening while oil, inflation expectations, fiscal borrowing, and long-term yields were all rising. 510

• Equities had turned defensive. On September 15, the Dow fell 0.63%, the S&P 500 0.45%, and the Nasdaq 0.78%; Asian markets were also softer, with Hong Kong down 1.0%, Shanghai down 0.54%, and Japan marginally lower. Yet the S&P 500 was still less than 3% below its August record, suggesting limited panic rather than a full risk-off event. 10139

• Why a hike was expected. Rate futures put the probability at 94.5%. The rationale was persistent above-target inflation, a resilient economy, and an oil shock that risked passing through to broader prices and wages; Warsh had already indicated that stronger activity and inflation could warrant higher rates. 1015

• Oil and fiscal pressure changed the policy outlook. Brent had reached a four-month high of $109.97 a barrel after a sharp jump, before easing to about $104.49; subsequent Middle East-related supply anxiety kept oil elevated. 14 Higher energy costs compounded inflation risk, while heavy government borrowing helped drive bond yields higher—making financing conditions tighter even before a Fed move. The U.S. 10-year Treasury yield touched 5.041%, its highest since 2007, and the average G7 10-year yield reached its highest level since mid-2008. 12

• Warsh faced an unusually political credibility test. Trump had selected him expecting lower rates and publicly pressed the Fed to cut, so a hike would demonstrate independence but risk a confrontation with the White House. 57 Conversely, failing to follow through after hawkish signals could reinforce investor doubt about the Fed’s inflation-fighting resolve. 11 Stephen Miran argued that a hike would be premature because recent inflation readings could be distorted and subject to revision, sharpening the internal and public policy debate. 4

• Expect volatility after the decision. Because a 25-bp move was substantially priced in, market reaction would hinge on the statement, vote split, forecasts, and Warsh’s press conference—especially the implied path for further hikes. A clearly hawkish message could push yields and equities lower initially; a less-hawkish message or doubts about policy independence could weaken the dollar despite the rate increase, as investors reassessed the expected path and inflation credibility.

• Historical context is conditional, not reassuring by itself. Stocks have often risen during tightening cycles when the Fed successfully restrains inflation without causing recession; they have performed much worse when hikes expose excessive valuations, financial stress, or a subsequent downturn. With yields already rising sharply, the risk was that markets would treat this cycle less as a routine normalization and more as a response to inflation and fiscal strain.

• The valuation warning was acute. The S&P 500’s equity risk premium—the extra expected return for owning stocks rather than Treasuries—was reported near its lowest level since the dot-com era. 6 With 10-year yields around or above 5%, investors were receiving unusually little compensation for equity risk; that leaves expensive growth stocks, and the broader index, vulnerable to even modest rises in real yields, earnings disappointments, or a more hawkish Fed path.