The US decides what the key interest rate will be: what this means for the dollar and global markets

The U.S. Federal Reserve (Fed) concludes its two-day meeting on September 16, from which investors expect the first rate hike since July 2023. The decision will be announced at 21:00 Kyiv time. 

Ahead of the meeting, markets had practically priced in a 25-basis-point rate hike — to a range of 3.75–4.00%. At the same time, for investors, the Fed’s updated economic projections, the so-called dot plot, and regulator Chair Kevin Warsh’s rhetoric regarding further steps will be no less important than the decision itself.

What this means for markets in particular and the global economy in general is explained by UNN.

What is known about the Fed’s decision ahead of the meeting

At its previous meeting on July 28–29, the Federal Open Market Committee left the rate unchanged in the 3.50–3.75% range. This was the fifth consecutive decision to keep the rate unchanged in 2026. At the same time, divisions within the Fed deepened: three committee members advocated a 25-basis-point rate hike.

Over the past month and a half, the balance of risks has changed noticeably. August inflation data proved more persistent than pause advocates had expected, while oil prices exceeded $100 per barrel amid heightened tensions in the Middle East. A strong labor market provided an additional argument in favor of tighter policy. As a result, on the eve of the meeting, the futures market assessed the probability of a rate hike at approximately 90–93%.

A Reuters poll also recorded a sharp reversal in expectations. Following the latest data, 86 of 101 economists, or 85%, forecast a quarter-percentage-point rate hike. Just a week earlier, most respondents expected the Fed to leave the rate unchanged. Such a rapid reassessment shows how sensitive the market has become to any signals regarding inflation.

How forecasts for the U.S. economy have changed

The key document of the September meeting will be the new Summary of Economic Projections. The previous forecast, released in June, had already shown a noticeable shift toward tighter monetary policy. At that time, the Fed lowered its forecast for U.S. real GDP growth in 2026 from 2.4% to 2.2%, while sharply raising its inflation expectations.

In June, the median forecast for inflation based on the PCE index for 2026 was raised from 2.7% to 3.6%, while the forecast for core PCE was raised from 2.7% to 3.3%. The unemployment forecast, by contrast, was slightly improved, from 4.4% to 4.3%. At the same time, Fed officials raised their median estimate for the rate at the end of 2026 from 3.4% to 3.8%.

Since then, inflation risks have not disappeared. The August consumer price index rose 0.4% month on month, while core CPI increased 0.3%. Producer prices also remained high, while more expensive energy creates the risk of another pass-through of costs into consumer prices. That is why markets will be watching to see whether the Fed raises its PCE forecast and whether the dot plot shifts toward a greater number of rate hikes in 2026–2027.

How the decision will affect the dollar and global markets

For the foreign-exchange market, the 25-basis-point rate hike itself has already been largely priced into quotes. Ahead of the decision, the dollar is trading near multiweek highs against a number of currencies, while the dollar index is close to 99.6 points. Therefore,  the realization of the expected scenario may give the U.S. currency only a moderate boost.

Much more important will be the signal regarding the future path of interest rates. If the Fed indicates that it is prepared for several further hikes, U.S. Treasury yields may remain high, while the dollar could receive additional support. If, however, Warsh emphasizes that the current move is a one-off response to inflation, the market may begin taking profits on long-dollar positions. Currency analysts at Danske Bank also expect some dollar strengthening if rates are raised, although a significant part of such a decision has already been priced into the market.

For stock markets, a higher rate means more expensive financing for businesses and higher alternative yields on bonds. This puts pressure primarily on companies with high valuations and substantial capital needs. Ahead of the meeting, the yield on 10-year U.S. Treasury bonds tested the 5% level, while the S&P 500 retreated from its record high in August.

At the same time, the reaction of stocks will not necessarily be unequivocally negative. If a rate hike is accompanied by forecasts of sustained economic growth and controlled inflation, some investors may interpret it as a signal that the Fed does not see an immediate threat of recession. For gold, tighter policy is usually a restraining factor because of a stronger dollar and higher yields, although geopolitical demand for safe-haven assets is currently partly offsetting this effect.

For emerging markets, a tighter Fed traditionally means more expensive dollar financing and increased competition for capital from U.S. assets. 

For Ukraine, in turn, the direct impact on the cash dollar exchange rate is limited by the managed flexibility regime and NBU foreign-exchange interventions. However, the indirect effect may be felt through the euro-dollar pair, the cost of external borrowing, commodity prices, and global investor risk appetite. A longer period of high rates in the United States also increases the cost of capital worldwide, which matters for Ukraine’s future reconstruction and private investment.

What analysts say

Ahead of the meeting, major international banks have generally shifted toward a rate-hike scenario. Goldman Sachs, JPMorgan, HSBC, and Deutsche Bank expect a 25-basis-point move. HSBC says that the lack of progress in combating inflation has tilted the balance in favor of a hike. JPMorgan also points to the combination of high inflation, rising energy costs, and increasing bond yields.

At the same time, analysts are divided over whether the Fed is beginning a new cycle of policy tightening. Goldman Sachs, for example, expects the regulator to resume cutting rates in 2027, although later than previously forecast. By contrast, more than half of the economists in the latest Reuters poll believe that by the end of March 2027, the Fed will implement at least one more rate hike.

Therefore, the main intrigue of the September meeting is no longer only whether the Fed will change the rate by 25 basis points. The market will try to understand whether this move will mark the beginning of a new cycle of fighting inflation or a short-term adjustment after a prolonged pause. The answer will determine not only  the dollar’s exchange rate and the performance of U.S. indices, but also the cost of global financing, capital flows to emerging markets, and commodity prices.

We remind you

As reported by UNN, the dollar surged after the Fed chair hinted at a possible rate hike.