FOMC Meeting, September 15-16

Fed hikes as policymakers lose patience

• The Federal Reserve raised the federal funds rate by 25 basis points (bps) to a target range of 3.75%-4.00%. The accompanying 130-word statement described the policy decision as an effort “to support a timelier return to the 2% inflation target.” The unanimous decision reflected the Committee’s determination to restore price stability.
   
• Fed Chairman Kevin Warsh justified the Federal Open Market Committee’s (FOMC’s) rate hike decision on the basis of three factors: a strengthening economy, inflation running above the 2% target and geopolitical “hot spots.” In his prepared remarks, he noted that in light of these factors, the Committee decided to remove “a dose of accommodation.” This marks a notable shift from the prior characterization of monetary policy as “modestly restrictive,” implying further tightening ahead.
  
  
• The latest dot plot of median rate expectations was decidedly more hawkish, with one additional rate hike expected in 2026 and no cuts in 2027. In fact, 12 participants expect one more fed funds rate increase this year and four see 50bps of additional tightening, while only two participants expect the Fed to remain on hold. The dot plot now shows the median fed funds rate above its pre-decision level through the end of 2028.
   
• The Summary of Economic Projections (SEP) revealed several inconsistencies that Warsh brushed aside by noting that they are not his forecasts. Simply put, the Fed expects stronger growth and higher inflation, yet it also anticipates tighter policy and weaker productivity growth. This implies that a tighter monetary policy stance would have little effect on the economy’s momentum or cyclical inflation pressures.
  
  
• The key missing element in Warsh’s narrative was transparency around how tighter policy would address the inflation overshoot. It appears that the core of the FOMC is aiming to remove some or all of the 75bps of policy accommodation introduced in late 2025. The objective is tighter financial conditions and disinflationary demand destruction. The risk is substantial for an economy already facing income erosion, supply-driven inflation and persistently elevated rates.
   
• Despite our view that a series of rate hikes is not the optimal prescription for inflation driven primarily by supply shocks and AI-related investment that is largely insensitive to interest rates, we believe the Fed is on track for an additional 25bps rate hike in December. This could create further strain for already-constrained interest-sensitive sectors while doing little to slow the AI-led investment surge beyond increasing the risk of a stock market correction.

Statement remains short and devoid of signals

The unanimous policy statement described activity as expanding at a “solid pace,” with uncertainty remaining “elevated,” owing in part to geopolitical developments. Domestic demand was characterized as “resilient,” productivity as “strong” and capital investment as “robust.” While the unemployment rate was seen as little changed, the statement merely noted that inflation remained “elevated” and that the rate hike was aimed at securing “a timelier return to the Committee’s 2 percent goal.”

It is important to stress that FOMC statements now begin with: “The Federal Open Market Committee approved the following statement for release by a 12-0 vote.” While this creates the impression that the vote pertains to the fed funds rate decision itself, the wording specifically refers to approval of the statement. 

That leaves little room for expressing differences of opinion around the rationale for tightening policy, and we expect several policymakers who favored a tighter stance to speak more openly in the coming days about their reasoning. In particular, we have reservations about the Committee’s broad characterization of an economy that is strengthening, a point that Warsh returned to several times.

Press conference

We weren’t sure which Warsh would show up at the press conference: the central banker who delivers an assessment of economic conditions, explains the risks to the outlook, discusses the Committee’s decision and lays out his policy reaction function — or the more cryptic Chairman who refuses to share his views on the economy and policy outlook. The former was expected, and that is who showed up.

In what may have been one of the shortest press conferences on record, lasting just 27 minutes, Warsh framed the decision to tighten monetary policy around three factors. First, he repeated more than 10 times that the US economy was strengthening, supported by a labor market operating at full employment. Second, referring to his Jackson Hole Symposium address, he noted that inflation trends were not “passing the test.” Indeed, last month he said the test was whether “underlying inflation is moving to our objective, clearly and at sufficient speed.” Third was geopolitics, with Warsh noting that there is “no hiding from hot spots around the world” and that “our judgment about what is the most likely, or least likely, of the geopolitical situation has changed.”

Warsh attempted to maintain optionality and push back against the dot plot’s indication of another rate hike in 2026. He stressed that the rate hike was “a sober decision, serious decision, responsible decision,” adding that he was “not going to pre-judge any future decisions” and emphasizing that he is “committed to a discipline, a set of principles.”

However, his introductory remarks were clear. The Fed intends to remove some or all of the “dose of accommodation” represented by the 75bps of policy easing delivered in 2025.

As expected, he attributed rising bond yields to stronger growth expectations, increased demand for capital stemming from the AI investment boom and geopolitics. Notably absent from that explanation were widening fiscal deficits, inflation volatility and concerns about Fed credibility.

Hawkish median rate expectations

The key message from the SEP came from the dot plot. The 2026 rate path shifted decisively higher, with the median policy rate forecast rising from 3.8% to 4.1%. Sixteen of 18 policymakers now expect at least one additional rate hike this year, including four anticipating 50bps of additional tightening before year-end, while only two participants see rates remaining unchanged. The clear signal is that most policymakers no longer view current interest rates as sufficiently restrictive given resilient growth, persistent inflation and supply-side risks.

More importantly, the updated dot plot points to a notably higher rate path over the medium term with policymakers no longer expecting any policy easing next year and projecting only a gradual decline in rates thereafter. The policy rate is expected to move from 4.1% in 2027 to 3.9% in 2028 and 3.6% in 2029, while the longer-run policy rate was slightly revised up to 3.2%.

The economic projections saw only modest revisions, suggesting Fed officials expect both growth and inflation to remain resilient. Real GDP growth in Q4 2026 and Q4 2027 was revised up by 0.1 percentage points (ppt) to 2.3% year over year (y/y) and 2.4% y/y, respectively. Headline personal consumption expenditures (PCE) inflation was revised up by 0.1ppt to 3.7% y/y while the median core PCE projection increased by 0.1ppt to 3.4% y/y. Notably, core inflation is not projected to return to target until 2029. More significant was the Fed’s reassessment of labor market resilience, with policymakers revising their unemployment rate forecast down from 4.3% to 4.1% through 2028.