Warsh delivers, with the door to further Fed hikes still open
The FOMC raised the fed funds target range by 25bp to 3.75–4.00% this evening on a unanimous 12–0 vote, the first increase since July 2023.
That matches the call we revised after Friday's hot core CPI print and reiterated in our week ahead. The statement was again strikingly terse, recognising elevated uncertainty partly owing to geopolitical developments, while offering little else of note. Warsh's aversion to forward guidance, meanwhile, left the dots to do the talking, with his press conference giving away few, if any, hints on the future path for rates.
Still, the dots proved hawkish relative to June, with the 2026 median rising to 4.1%, implying one further hike this year, with sixteen of eighteen participants pencilling in at least one more move and four seeing two.
The 2027 median also lifted to 4.1%, while the longer-run estimate edged up to 3.2%. Core PCE for 2026 was nudged to 3.4%, and unemployment was lowered to 4.1%. In short, the door to another rate hike remains firmly open, even if Warsh is, as yet, disinclined to walk through it.
Even so, given the totality of today’s written commentary and Chair Warsh’s press conference, we think the bar to further hikes is lower than previously assessed.
Clearly, a large section of the committee is now in favour of further tightening. Warsh’s press conference, meanwhile, suggests that he is unlikely to stand in the way of such a move, pointing to a solid labour market, stalled disinflation, and geopolitical developments as necessitating higher rates today.
Admittedly, we would be inclined to quibble with at least some of these views. But conclusive evidence is unlikely to be accumulated ahead of the October policy meeting.
As such, we now see market pricing, which places next month’s decision at a coin flip, as fair. With such endorsement in hand, the dollar is on the front foot post-event, with the DXY rallying around 0.6%. Our sense remains that longer-term expectations for rate hikes are too aggressive, posing a medium-term dollar negative risk, even as more immediate developments support a stronger buck.