Sooo…in a line, a hike, and the shortest presser ever!
More seriously, I should probably start by admitting that I called this one BADLY wrong, the FOMC clearly have a much more bullish view of the US economy, and much less tolerance for looking through higher energy prices, than I’d expected
As such, it seems likely that the move today is the first in a series of hikes. The ‘dot plot’ indicated that the Committee probably see neutral around where the fed funds rate is right now, meaning that the logical assumption is that at least one more hike will be delivered in order to shift to an actually restrictive policy stance. Looking ahead, even though the ‘dot plot’ median pointed to no further hikes beyond this year, risks to that path clearly skew in a hawkish direction, given not only continued high energy prices, but also the resilient nature of the US economy
Clearly, this is an FOMC whereby the inflation side of the dual mandate is continuing to take precedence over the employment side. Not only is the standard to achieve the 2% target ‘clearly and at sufficient speed’, but Warsh also again made significant mention of the breadth of price increases at the post-meeting presser, suggesting that this is a metric investors should continue to pay close attention to. Again, Warsh reiterated that trends in data are of more importance than single data points, though clearly policymakers are not content with the present trend in price data
It was notable that Warsh did not believe the FOMC would need to engineer material labour market weakness in order to achieve price stability. This lack of a trade-off, if indeed it remains the case, should mean that the equity bull case continues to hold water even with this tighter policy backdrop, providing that there is no meaningful slowdown in consumer spending, or in AI Capex.
Perhaps an uncharitable characterisation of today’s move would be that while Warsh cannot be bullied by President Trump, he can be bullied by the bond market. Incidentally, Warsh wisely dodged questions regarding the President, but an inevitable Truth post can’t be far away. In any case, long-end yields are HIGHER post-FOMC, suggesting that perhaps the Fed weren’t the problem after all, and that a combination of crowding-out & higher growth expectations are what’s really driving yields higher.
Base case for now would be a 25bp hike in Dec, followed by a period on hold; though, as noted, risks to that skew hawkish, possibly towards another such hike in Q1 27, if meaningful inflation progress is not seen, and/or the geopolitical backdrop is yet to calm.
Disclaimer
The information and opinions contained in this publication are provided for informational and educational purposes only and should not be construed as investment advice, a recommendation, or an offer to buy or sell any financial instrument.
All views expressed are solely those of the author and are subject to change without notice. While every effort is made to ensure the accuracy of the information presented, no representation or warranty is made as to its completeness or accuracy.
Readers should conduct their own research and, where appropriate, seek independent professional advice before making any investment or financial decisions. The author accepts no liability for any loss arising from reliance on the information contained in this publication.
Any references to specific securities, asset classes, markets, or investment strategies are provided solely for illustrative and analytical purposes and do not constitute investment recommendations.