A Tough-Talking Fed Failed to Impress the Markets. What's Next?

The Fed sang the economy’s praises and talked tough about inflation, yet markets trimmed rate hike bets and the US dollar slipped. Now what?

• The Fed held rates steady and upgraded its description of economic activity from “solid” to “strong”
• Markets pared December rate hike odds and pushed their next expected 2027 hike from March to April
• The Atlanta Fed’s GDPNow model slid to 3.3% ahead of third-quarter GDP data

The Federal Reserve kept interest rates unchanged, as widely expected, and markets barely flinched. Stocks may be following last week’s script. Markets bounced higher at first as traders waited to get to the other side of big tech earnings, then plunged once results came in solid but unremarkable. This week, stocks again drifted higher into the news, but the S&P 500 is still carving out lower highs and lower lows. Its reaction to the Fed was muted, and it faded into the close. The tech-heavy Nasdaq 100 scraped at the top of a range it has held since mid-October.

How markets digest results from Alphabet and Microsoft, released after the Wall Street close, and from Amazon and Intel later in the week will test that pattern. The former two offer conflicting leads. GOOG shares plunged nearly 10% in after-hours trade after earnings per share (EPS) trailed baseline forecasts by a hefty margin while MSFT spiked nearly 7% before trimming gains a bit on broadly in-line results. If markets sell off at the index level despite generally solid outcomes on the whole, that’ll look like a pattern.

The US dollar weakened after the Fed announcement, with the euro, British pound, Australian dollar, and Canadian dollar all finding their footing. Crude oil went back on the offensive, while gold and silver softened.

A hawkish Fed told markets little they didn’t know

The policy statement changed little, but it upgraded the Fed’s description of economic activity from “solid” to “strong”, signaling a rosier view of the growth and a continued focus on inflation. Fed Chair Kevin Warsh struck a hawkish tone at his press conference, stressing the economy’s strength and the need to deliver price stability.

Markets were not swayed. Fed funds futures now put the odds of a 25-basis-point (bps) hike in December at about 83.5%, down from over 90% at the start of the week. That second hike of 2026 has been uncontroversial since the Fed’s September projections called for two this year and delivered the first. Traders still price 50bps of further tightening in 2027, but they have pushed the timing back, with the first follow-on hike now priced by April, a month later than before, and another seen by September. The Fed sees no hikes next year and a return to rate cuts by 2028.

Markets seem to have concluded that Warsh had to sound hawkish to set up a December increase, but nothing more. Like this season’s respectable but unsurprising earnings reports, the Fed delivered little beyond what was already priced in.

Is the AI trade still steering bonds?

Treasury bonds softened across the curve after the Fed, but their October rally remains intact. That rebound came even as crude oil climbed, turning the war trade on its head. Since the US-Iran conflict began in late February, markets had treated higher oil as a source of inflation and higher rates. In October, rates fell.

Stocks offer a clue as to why. The ProShares S&P 500 Ex-Technology ETF (SPXT) gained in October, suggesting lower rates lifted much of the market. Soggy tech shares were heavy enough to drag the S&P 500 lower however, with deeper losses in the Nasdaq 100. One explanation ties bonds to the AI trade. Long-term yields had been pushed higher in part by competition for funding between debt-laden governments and AI hyperscalers. If the AI boom offers less of a tailwind, that pressure on long-term borrowing may ease, supporting bonds.

Will third-quarter GDP back the Fed’s rosy view?

While Warsh praised the economy, the Atlanta Fed’s GDPNow model slid to 3.3%, its lowest reading yet for the third quarter, from 5-6% when tracking began. Consensus forecasts call for 3.2%, a meaningful pickup from the second quarter. The mix may matter more than the headline. The Fed’s October Beige Book described growth as narrowly focused on the data center buildout and defense, while strain spread from lower-income to middle-income consumers as the World Cup boost to spending faded. Consumption accounts for about 68% of the economy, while business investment, where the AI buildout lives, is about 14%. Even modest consumer retrenchment could overwhelm the data center boom.

If GDP data show soggy consumption beneath a firm headline, the markets’ 2027 rate hike bets may look increasingly out of step. That could extend the bond rally and the US dollar’s slide. Stocks would likely find little comfort in rate hikes fading for that reason, especially if big tech earnings again fail to impress.

Ilya Spivak, tastylive Head of Global Macro, has over 15 years of experience in trading strategy. He specializes in identifying thematic moves in currencies, commodities, interest rates and equities. He hosts Macro Money and co-hosts Overtime, Monday-Thursday. @Ilyaspivak

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