Federal Reserve Signals More Interest Rate Hikes Ahead

The waiting is over. The anticipation may have been over a couple of weeks ago, but the pricing in by financial markets for what happened on Wednesday afternoon has been ongoing.

In a move that surprised almost no one, the Fed’s Federal Open Market Committee or FOMC voted 12-0 to raise its benchmark overnight interest rate (the federal fund rate) by 25 basis points to a target range spanning from 3.75% to 4%.

The unanimous decision may have come as something of a surprise. In late July when the FOMC held rates steady, the vote went 9-3. I personally thought that Fed Governor Christopher Waller, who had recently expressed less hawkish views than Fed Chair Kevin Warsh, might dissent. I don’t think I would have made this move at this time, but my opinion is not meaningful. I do think that it shows a certain confidence in, or at least a respect for, the new chair that none of those governors that had been appointed to office by President Trump did dissent.

The Statement

The official statement, as short as it is, differed greatly (beyond the obvious rate hike) from the statement issued on July 29.

The statement acknowledged that geopolitical developments have created an elevated level of uncertainty. The statement also claimed that economic activity is still “expanding at a solid pace.” The Fed continues to see productivity growth as “strong” and capital investment as “robust.” Most importantly, towards the bottom of the statement, the FOMC explained: “Today’s policy action will support a timelier return to the Committee’s 2 percent (inflation) goal.”

The Economic Projections

Two things are obvious:

The Fed, in general, sees demand for labor as healthy and sees higher interest rates going into late 2026. The FOMC’s median outlook for the fed funds rate for year-end 2026 is for one more 25 basis-point rate hike over the final two policy meetings of the year. There were 17 “dots” cast. Warsh stayed out of it. Twelve of those dots implied that the Fed will hike one more time for 25 basis points this year. Four dots implied 50 basis-points’ worth of rate hikes into year’s end and two dots imply that the Fed is done for the year.

As for the projections, at the median, the FOMC sees year end GDP at growth of 2.3%, up from a view for growth of 2.2% in June. Very optimistically, the FOMC (at the median) sees unemployment at 4.1% down from a projection of 4.3% in June. As far as PCE inflation is concerned, the median moves up to 3.7% at the headline and 3.4% at the core from 3.6% at the headline and 3.3% at the core. In short, these updated projections probably surprise nobody. That said, there were probably a few market participants that were hoping for a “one and done” rate hike. That’s not what this looks like.

Opinion

The FOMC press conference was less eventful than have been similar press conferences in the past. There really was not a lot in the way of content. Here is the key Warsh quote taken from that press conference:

“This summer’s inflation readings do not tell me that underlying trends have meaningfully improved.”

I don’t know how much more information we need than that. It’s clear that, if conditions remain constant, that this Fed chair is naturally hawkish, which we knew. This Fed chair wants to raise rates further and he has the backing of his troops. Treasury yields have responded and spiked, at the short end of the curve in particular. The long end spiked but is still below last night’s overnight levels. The short end is pricing in that extra rate hike that will probably land on December 9. This will do some damage to risk asset prices in the short- to medium-term. Small caps will be hurt more than large caps. The U.S. dollar will rise in value relative to its reserve currency peers. That will likely force downward pressure on commodities prices (hopefully including crude oil).

At the time of publication, Guilfoyle had no positions in any securities mentioned.