BMO anticipates consecutive follow-up hikes in October and December, with the cumulative impact of three hikes potentially erasing all anticipated rate cuts for 2025. Vanguard Group considers "three consecutive hikes" a reasonable baseline, though the actual number could reach as high as six. Historical precedents show exceptions: in 1997, the Federal Reserve raised rates only once and took no further action over the subsequent 18 months. Meanwhile, trillion-dollar debt financing by AI giants, the insurance industry’s exposure to private credit, and the 10-year U.S. Treasury yield approaching 5% constitute the most critical risk pressure points in this current rate-hiking cycle.
Market consensus has largely formed around the expectation that the Federal Reserve will raise interest rates next week. However, the key concern for investors lies in how far the hiking cycle will extend and which segments of the market will face the greatest pressure from continued monetary tightening.
On September 11, MarketWatch reported that Ian Lyngen, Head of U.S. Rates Strategy at BMO Capital Markets, expects the Federal Reserve to implement two additional 25-basis-point rate hikes at its October and December meetings, following this month's increase. These three hikes in total would push the federal funds rate target range back to 4.25%–4.5%, effectively reversing the rate cuts implemented in 2025 under former Fed Chair Powell. Josh Hirt, Senior U.S. Economist at Vanguard, also stated that three rate hikes constitute a "quite reasonable starting point" for assessing the Fed's trajectory, though he noted that the potential number of hikes could range from one to six.
Regarding market vulnerabilities, analysts have identified two major potential risk exposures: the optimism underpinning the surge in artificial intelligence spending, and the insurance industry's significant holdings in private credit. Meanwhile, concerns over the widening U.S. fiscal deficit are intensifying; if the yield on 10-year U.S. Treasury bonds reaches 5%, the market may face a new wave of selling pressure.
"Three Consecutive Hikes": Historical Patterns and Current Expectations
Economists generally point out that the Federal Reserve has rarely been content with implementing only a single rate hike in its history.
According to reports, Derek Tang, a policy economist at Monetary Policy Analytics, stated that once rate hikes begin, policy inertia often drives multiple consecutive actions.
Ian Lyngen's baseline forecast calls for 25-basis-point rate hikes in July, October, and December. If this path materializes, the federal funds rate will return to the 4.25%–4.5% range—a level comparable to the peak before the rate cuts at the end of 2024—implying a full reversal of the easing measures undertaken over the past year.
Josh Hirt offers a broader scenario framework for the market. He stated that a reasonable range for the number of rate hikes is one to six, with three serving merely as a starting point for analysis; the final trajectory will depend on the evolution of inflation data.
It is worth noting that there have been historical exceptions: in 1997, the Federal Reserve raised rates only once and took no further action for the subsequent 18 months until it shifted to rate cuts.
The AI Spending Boom: One of the Greatest Pressure Points in a High-Interest-Rate Environment
Derek Tang explicitly pointed out that the optimistic expectations underpinning the artificial intelligence spending cycle are among the most concerning vulnerabilities in the current environment of monetary tightening.
Charlie Ripley, Senior Portfolio Manager at Allianz Investment Management, explained the transmission mechanism: AI "hyperscaler" tech companies are estimated to incur annual capital expenditures of up to $1 trillion over the next few years, and these firms rely heavily on debt financing. A rise in long-term interest rates will directly increase borrowing costs, thereby compressing investment returns.
According to reports, Ruchir Sharma, Chairman of Rockefeller International, recently expressed similar concerns in an article for the Financial Times: as U.S. government bond yields rise to 5%, large technology companies will have to compete directly with the government in the debt market. Some firms may consequently be crowded out of financing channels, posing a risk that the AI boom could be prematurely terminated by high borrowing costs.
Charlie Ripley also agreed that once the yield on the 10-year U.S. Treasury note touches 5%, it could become the tipping point triggering a market sell-off.
Private Credit and Insurance: Overlooked Systemic Risks
The second vulnerability identified by Derek Tang is the insurance industry's substantial allocation to private credit.
The International Monetary Fund (IMF) has previously issued warnings on this matter: insurers held partially or entirely by private equity firms lack transparency and tend to allocate to higher-risk fixed-income assets. Once sharp fluctuations in the interest rate environment cause losses, risks may spread from the insurance sector to the banking system, creating cross-sector systemic transmission.
Tang stated, "This is an area where I believe market participants should pay more attention."
Key Differences Between This Rate-Hike Cycle and Historical Crises
Despite the clear risks, Hirt from Vanguard believes that this potential rate-hike cycle differs fundamentally from those in history that triggered major financial crises, and simple comparisons should be avoided.
He pointed out that both the collapse of Silicon Valley Bank in 2023 and the municipal bankruptcy of Orange County, California, in 1994 occurred against the backdrop of the Federal Reserve abruptly reversing market expectations—when interest rates rose rapidly from low levels, catching the market off guard. The current situation, however, is markedly different:
The Federal Reserve has already undergone a significant rate-hiking cycle between 2022 and 2024, with interest rates remaining generally elevated, so the market is familiar with the policy direction. Any further rate hikes at this stage would be more about identifying the appropriate interest rate level to exert downward pressure on inflation, rather than overturning the prevailing market narrative.
The report noted that this assessment provides the market with a certain degree of buffering logic, but analysts widely emphasized that the structural vulnerabilities in the AI financing chain and the private credit sector still require continuous monitoring.
Edited by Jeffy