The Federal Reserve has officially entered a rate hike cycle under new leadership, with Federal Reserve Chair Kevin Warsh-led FOMC raising the fed funds rate by 25 basis points to a target range of 3.75%-4.00% in its first hike since July 2023. The move was unanimously approved by all 12 voting officials, with 16 of 18 policymakers now expecting at least one more increase before the year ends. This marks the first policy shift under the new Fed chief, who took office in late May after being selected by Trump with an expectation that he would cut rates. The FOMC's policy statement noted that 'economic activity is expanding at a solid pace' and that 'inflation remains elevated', with the committee stating this action will support a timelier return to its 2% inflation goal. Consumer inflation stayed at 3.4% in August, prompting this necessary action as the central bank had earlier chosen to wait before changing rates, but the latest inflation data strengthened the case for action. The statement dropped its previous explanation for inflation that pinned part of high inflation on supply shocks in sectors including energy, with officials now raising their assessment of business investment and swapping Middle East conflict references for broader geopolitical developments. During his press conference, Warsh said the committee would 'deliver price stability,' as reported by Reuters. Warsh's comments are being read as hawkish on top of a hawkish dot plot, which reinforces the view that there will be additional hikes in the upcoming meetings, according to independent metals trader Tai Wong. Warsh reiterated his commitment not to give forward guidance on the rate path, pointing to trends in economic data to deliver the Fed's stated objective of price stability.
Following Wednesday's meeting, stocks fell, with the benchmark S&P 500 ending down 0.45%, while the Dow dropped more than 600 points and the Nasdaq was flat. The 2-year Treasury yield rose seven basis points as investors priced higher policy rates, while the 10-year ended broadly unchanged, taking comfort from the Fed's resolve on inflation. The dollar firmed, oil slid almost 4% to $102 based on signs that Middle East supply outages may be resolving, and gold eased 0.69% to around $4,263/oz. Markets were mildly disappointed with the reaction, as the hike itself was no surprise with futures pricing in a 93–94% probability, but the forward guidance was more hawkish than investors had anticipated. Fed Funds futures now assign roughly an 89% probability to another hike by December, according to CME FedWatch. "A unanimous hike materially raises the probability of another move before year-end, and investors positioned for the easing cycle of early 2026 need to fully recalibrate," said David Krakauer, vice president of portfolio management at Mercer Advisors. "This meeting landed as hawkish as it could have been -- the thoughts, the message, the unanimous decision itself," said Danny Zaid, portfolio manager at TwentyFour Asset Management. "Much of the tightening risk is already priced in, but the bigger signal is whether the Fed believes this is enough or the beginning of more to come," said Karen Manna, fixed income strategist at Federated Hermes.
The Fed's latest projections show 12 of the 18 officials expect one more 25-basis-point rate hike this year, while four see two additional hikes and two see no more hikes, according to The Financial Express. The median 2026 Fed Funds ending rate was 4.1%, implying another quarter-point hike before year-end, with the 2026 year-end range coming in relatively tight at 3.9% to 4.4%, suggesting a reasonable, though not unanimous, conviction among voters. The most important consideration was the 2027 projection, where the median remains at 4.1%, up half a point from June's 3.6%, effectively erasing the rate-cut path the committee had penciled in three months ago. Cuts are not forecasted to begin until 2028, a much more hawkish stance than markets had priced. The dot plot projections show officials put core PCE inflation at 3.4% in December 2026 and 2.5% a year later, while cutting unemployment forecasts to 4.1% for both years, from 4.3%. The September 2026 dot plot shows 18 dots for 2026 and 2027, and 17 dots for 2028 and 2029, since Fed Chair Kevin Warsh did not submit any, as reported by The Financial Express. The signal is clear. Fed officials, and Warsh himself, want to bring down inflation by raising rates, backed by a strong job market, according to Artha Bharat Global Multiplier Fund. The most important known-unknown to influence monetary policy over the next few Fed decisions will be the energy price shock, with higher gas and diesel prices adding significant uncertainty to future moves.
Energy prices could decide how many more hikes are coming, with Brent oil trading above $104, rising nearly 15% in the last month, according to The Financial Express. The energy index had been declining since May but rebounded in August, rising 23.5% for the 12 months ending May, 15.7% for June, 14.7% for July, and 16.3% for August. The US CPI data released this week shows headline inflation remaining sticky, while month-on-month core inflation stayed slightly elevated. The key change to the Fed's policy statement was dropping a phrase from the July statement that partly blamed 'supply shocks' for driving 'price increases in certain sectors, including energy.' The September statement simply describes current inflation as 'inflation remains elevated', with the change emphasizing that the committee is committed to the inflation target and won't make excuses for missing it, as noted by Bill Adams, Chief U.S. Economist at Fifth Third Commercial Bank. The most important known-unknown to influence monetary policy over the next few Fed decisions will be the energy price shock, with the higher gas and diesel prices go, and the longer they stay up, the more the Fed will hike, according to Adams. Alternatively, a breakthrough unlocking energy supply from the Mideast could allow the Fed to refrain from further hikes.
My prediction of 5% GDP growth last December on Maria Bartiromo's show may finally come to fruition, as the Atlanta Fed raised its third-quarter GDP estimate to a 5.1% annual pace following strong economic data. The Commerce Department announced that retail sales surged 1.2% in August, which was well above economists' consensus estimate of a 0.8% increase, with fully 12 of the 13 categories surveyed reporting an expansion in August. Consumers were clearly out and about in August, since sales at bars and restaurants rose 1.2%, while auto sales rose 0.6% in August. Excluding autos and gas stations, core retail sales rose a healthy 1.2%, demonstrating broad-based consumer spending strength. During his press conference, Fed Chairman Kevin Warsh said the FOMC vote 'shows our resolve to achieve price stability on a timelier basis,' citing three key developments since July that brought the FOMC consensus together: stronger economic growth, insufficient improvement in inflation, and increased geopolitical risks. Warsh noted that the prospect of more inflationary pressures from higher oil prices is clearly bothering the FOMC, as higher transport costs cause inflation to spread to many goods. Naturally, President Trump was not happy with the Fed rate hike and called it a 'hostile' act, however, Trump's relationship with Kevin Warsh remains fine, because he acknowledged talking to the Fed Chairman before the FOMC meeting. Warsh did Trump a favor by citing geopolitical risks, so if Trump can stop some of the hostilities in the world and get crude oil prices to decline, then the Fed may run out of reasons to raise key interest rates.
