The Fed raised rates on Wednesday, thank God.
I say “thank God” because a Fed that failed to follow through on a hike that was priced as a near certainty by markets at a time when inflation risks remain to the upside, the labor market’s steady, consumption’s holding up and the long-end’s looking for an excuse to extend a selloff that’s pushed yields to post-GFC highs was a Fed that courted disaster.
As BMO’s Ian Lyngen remarked on Wednesday morning in the US, there’s “no modern precedent for the Fed failing to deliver a policy outcome that is more than 90% priced in the futures markets.”
Wednesday marked the first hike since July of 2023. The decision was unanimous, which was nice to see.
There’s a time and a place for everything, but September 16, 2026, was neither for a dovish FOMC surprise. “Staying on hold would not only exacerbate concerns about the Fed’s inflation-fighting credibility and political independence ahead of the mid-terms, but also call into question the effectiveness of its communication strategy given how heavily positioned the market [was] for a quart-point rate increase,” BMO’s US rates team went on, in the same note mentioned above.
The new statement was curt, consistent with Kevin Warsh’s determination that less is more when it comes to communications. “Economic activity is expanding at a solid pace. While uncertainty remains elevated owing, in part, to geopolitical developments, domestic spending has been resilient,” the Committee said, adding that productivity growth’s strong and capital investment robust. Job gains are keeping up with the workforce. Inflation, unfortunately, “remains elevated.”
As for the new dot plot — and frankly, I wasn’t entirely sure there’d be one — the median 2026 dot tips one additional hike over the balance of the year. The median 2027 dot reflects no change to policy rates next year. The newly-introduced (and completely useless) 2029 dot is 3.60%, meaningfully higher than the new long run neutral dot, which shifted up by 10bps to 3.20%.
At 4.1%, the unemployment rate projection in the SEP was lower for this year and next (it was 4.3% for both years in the June projections), while the GDP growth outlook was revised to the upside. Both the headline and core PCE projections were bumped up by a tenth to 3.7% and 3.4% for this year, respectively.
Needless to say, the hike — to say nothing of the prospect for another one, presumably in December — won’t go over well with Donald Trump, nor will he be pleased to hear the “median” Fed official doesn’t expect to lower rates next year.
“Today’s policy action will support a timelier return to the Committee’s 2% [inflation] goal,” the statement said, adding that the Fed “will deliver price stability.” Promises, promises.
25 bp might be both too much (for Trump) and too little (for inflation credibility)? 50 bp would have been a statement. 25 bp with guide of more coming might have been a statement, but Warsh won’t guide. But better than a craven hold, for sure.
Stradling the fence.
When does the president stop trading with the countries that are running a trade surplus with the USA?
I was wrong. I thought Warsh would dissent…
Interesting
I wonder, if there is going to be end of their friendship calls?
The tell to watch for will be Trump’s inevitable raging against the FOMC (the M stands for ‘Machine’).
If his raging is directed in a general sense, he knew this was coming. If it’s directly specifically at Warsh, it suggests betrayal. I should probably put “betrayal” in scare quotes there, but you get my meaning. Also there will be some nuance. It’s possible he’ll criticize Warsh’s leadership without making it too brutal or personal, in which case it might fall under “knew it was coming,” but it’s just window dressing. If Warsh’s golf game gets called out though, the man better work on his putts.
“without making it too brutal or personal” ?
This is still DJT we’re talking about. Brutal and personal is kind of his thing
Here’s the way I think about it. As I’ve argued before, in order to get the job in the first place, Warsh had to have convinced Trump that he was loyal. Imagine he accomplished that by providing Trump with some sort of kompromat. Trump now tweets (truths?) about Warsh & the Fed. Does it seem like Trump is just airing grievances, or does it seem like he’s deploying the kompromat? Regardless, it’s going to be a Festivus for the rest of us.
My take is that the minimal rate hike today gives Warsh cover to skip next month before the mid-terms, though I doubt he convinced our Favorite Forward Guider of the corollary merits of avoiding a tantrum in front of a critical elecfion for the entire Republican party (not to mention the rest of us and possibly the world).
But as much as this hike might have been considered improbable after Warsh’s appointment, I’d have to say the same about the “new and improved” BLS delivering a barnburner jobs report and warm inflation reads on both PPI and CPI on the cusp of this FOMC meeting. So I am shedding my BLS tin foil gerrymander hat that seemed to fit so snugly. I think we were all wrong about that seeming probablility. For now.
Considering Trump stated “I talked to Kevin. I said you might as well vote with the board because it’s not going to matter… I said, do what you want.” I’m thinking this decision isn’t a sign of ‘independence’ as it were.