Fed Recap:

by Michael P. Reinking, CFA & Eric Criscuolo

For the first time since January 2023, the FOMC unanimously hiked rates by 25bps, which the Committee said “will support a timelier return” of inflation to their stated 2% goal (more on that in a minute). The outcome was widely expected though the unanimous support was somewhat surprising.  Once again, the statement followed Warsh's principle of brevity, with no major changes to the description of the economy, while stressing “The Committee will deliver price stability.”

The last update to the Summary of Economic Projections (SEP) was at the June meeting. A lot has changed since then, except for inflation which remains well above target. Chair Warsh once again refrained from submitting his projections. GDP estimates were increased by 0.1% in both 2026 and 2027. The Unemployment Rate moved lower by 0.2% holding steady at 4.1% through next year. Inflation projections for this year increased by 0.1% but fall significantly next year with core declining from 3.4% to 2.5%. That expectation however is largely in line with the last SEP in June. It’s notable that the Committee does not see core returning to target until 2029. That stretches the meaning of “timely”. It also makes the dot plot and Statement somewhat conflicting.  

There was broad support for an additional hike with 16 of the 18 officials seeing at least one more by year end, with four of them penciling in 50bps of increases (i.e. 2 hikes). The surprise comes in 2027 with the median dot holding steady at 4.1%- despite core median core PCE expectations of 2.5%. However, it also produces a "higher for longer" outcome. Assuming we get one more hike this year, 8 officials expect one additional hike next year, 6 expect rates to remain unchanged and 4 officials project multiple rate cuts. If the hope for today was to gain credibility in its inflation fight the supporting materials felt more like a boxer sizing up its opponent with some jabs to get spacing as opposed a throwback Mike Tyson in the first round. 

During his prepared remarks the Chair suggested that the rate hike comes at a time when the economy seems to be strengthening and reiterated, “I would be hard-pressed to describe broad financial conditions as restrictive. This view was widely shared by the Committee. So, we removed a dose of accommodation.”

This seems to suggest that the Committee is looking to unwind some if not all of the late 2024 cuts. He later said, “The decision we made today was a sober decision”, so at least we know they weren’t playing beer pong for two days. The press conference lived up to its billing with a less communicative Fed Chair. He didn’t really shed any additional light on the path of policy outside of saying he won’t prejudge it and reiterating he prefers trends over data points. The press was limited to one question which he often cherry picked and the press conference seemed to end promptly at 3:00 with Warsh doing his own version of an Irish goodbye. 

Expectations for a hike in October stand at ~50%, up from 44% yesterday and 18% a week ago. That would be just before the mid-terms. Speaking of, President Trump had some not terribly surprising comments on the Fed decision, saying "Interest Rates in the United States should be 1%, or less..." Market odds for another hike after that, to 4.25% - 4.50%, in December stand at 39%, up from 29% yesterday and 10% a week ago.

The S&P had a modest gain heading into the decision. Equities initially fell on the release, then rallied back early in Warsh’s presser. That didn’t last long though as stocks turned decidedly lower in the middle of the Q&A. The S&P fell as low as 7510, tagging the 100d ma, before bouncing into the close to end the day down 0.5%, at ~7550. The Russell 2000 ended the day inline.

The equity weakness came as yields sharply reversed. The 2y yield was down ~5bp before the release. However they moved higher after the release and didn’t look back, ending the day up 7bp, a ~14bp reversal from the lows. The 10y and 30y also ended the day well off their lows but finished largely unchanged on the day. The Dollar Index rallied strongly, driving back up through 100. 

Financials saw the most weakness as the short-end move bear-flattened the yield curve. Energy led the decliners overall with oil falling.

For tomorrow we have Housing starts, Pending Home sales and jobless claims on the calendar, along with the Philly Fed manufacturing index. The BOE will have its rate decision as well. Enjoy your evening.

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