The Fed meets expectations; Warsh offers a little more
The Fed left rates at 3.75-4.00% this evening, as we and markets expected.
A 10-2 vote split saw Lisa Cook and Beth Hammack both dissenting in favour of a 25bp hike, with Cook's vote notable given the Trump administration's repeated attempts to remove her. A now typically terse statement also leaned hawkish in our view, describing activity as expanding at a strong pace and inflation as elevated.
Meanwhile, new language tying the policy stance to the accumulation of more information keeps December live, albeit without explicitly pre-committing.
Even so, Chair Warsh’s press conference offered something approaching guidance, in contrast with his usual reticence, offering a signal on the direction of travel. The Chair noted that Q3 growth is set for a rapid advance, inflation is too high, and there is no soft target, conceding that price stability has not yet been delivered, saying only that the Fed is "working on it". That to us sounds like further tightening is likely, although an announcement that one meeting in 2027, and two in 2028, will carry no rate vote, has seemingly been read as a Fed that will act less often, with obvious dovish implications against the current backdrop.
Indeed, looking at market pricing, front-end yields have fallen, the curve has steepened, and the dollar slipped post-announcement.
But with no resolution in sight for the ongoing conflict in the Middle East, risks, we think, point toward tighter policy in the coming months. We thus retain our view set out after September's CPI, that an October hold likely precedes a 25bp hike in December. That should bias the dollar higher near term, immediate price action notwithstanding, though we also suspect the Fed will ultimately disappoint market expectations in 2027 as inflation pressures start to cool.