The Fed could raise interest rates three times. Here's where the market could face the stiffest test.

By Greg Robb and Joy Wiltermuth

Economists note that the Fed historically has not been content to raise rates only once

Federal Reserve Chairman Kevin Warsh has stressed his concern about the outlook for inflation. The markets expect an interest-rate hike next week.

With financial markets convinced the Federal Reserve will hike interest rates on Wednesday, two questions naturally follow: How high will rates go, and will tighter monetary policy lead to any breaks in financial markets?

Economists note that the Fed historically has not been content to raise rates only once.

Ian Lyngen, head of U.S. rates strategy at BMO Capital Markets, said he assumes that a quarter-point hike this month would be followed by similar hikes at both the Fed's October and December meetings.

This would effectively undo the 2025 rate cuts pushed by former Fed Chairman Jerome Powell, and would bring the central bank's benchmark interest rate to a range of 4.25% to 4.5%.

See also: MarketWatch's live coverage of the August CPI report.

Josh Hirt, senior U.S. economist at Vanguard, said a forecast of three hikes is a "pretty reasonable starting place" for thinking about where the Fed might go. In an interview, he said the range of possible hikes is anywhere from one to six moves.

As far as the repurcussions of such tighter monetary policy, Derek Tang, a policy economist at Monetary Policy Analytics, said two areas of potential financial-market vulnerabilities are clear: the optimism fueling the artificial-intelligence spending cycle, and the insurance sector's holdings of private credit.

"Those are a few things I think people should pay more attention to," Tang said.

There is also growing unease about the U.S. budget deficit. Ruchir Sharma, chair of Rockerfeller International, said in a recent op-ed in the Financial Times that he was worried higher borrowing costs might short-circuit the AI boom. When Big Tech has to compete with a government paying a yield of 5% on its bonds, many firms may be crowded out of the debt markets.

Charlie Ripley, senior portfolio manager at Allianz Investment Management, agreed that a 5% yield on the 10-year Treasury note BX:TMUBMUSD10Y could tip the tide into a selloff.

In an interview with MarketWatch, Ripley pointed to the heavy borrowing needs of the "hyperscalers" of the AI race, including estimates of $1 trillion in capital expenditures annually over the next few years. Higher long-dated yields push up the cost of all that borrowing.

The International Monetary Fund, meanwhile, has warned about the opaque nature of insurance companies that are partly or fully owned by private-equity firms. These firms have been investing in riskier fixed-income assets, and losses cause by volatility in the interest-rate environment could spill over into the banking sector.

Vanguard's Hirt said the Fed's potential hiking cycle this year is different from previous cycles that led to seminal financial crises, like the collapse of Silicon Valley Bank in 2023 or the municipal bankruptcy of Orange County, Calif., in 1994.

The Fed recently pursued a significant hiking cycle between 2022 and 2024, interest rates generally remain high and it would not be a sudden shift in expectations, he noted. In those famous cases that led to crises, the Fed was flipping the narrative; in this case, it is simply trying to find a level of rates that would put some downward pressure on inflation.

There have been historical exceptions to the idea that one rate hike would lead to several more: In 1997, the Fed hiked rates once, and then made no moves until a rate cut 18 months later.

U.S. stocks DJIA SPX COMP were climbed on Friday following the latest consumer-inflation reading, and as oil prices (CL00) (BRN00) eased.

-Greg Robb -Joy Wiltermuth

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09-11-26 1954ET