UniCredit Review on FOMC - FJElite
Yesterday, the Fed delivered a 25bp rate hike, raising the target range for the federal funds rate to 3.75-4.00%. The move was in line with our and the consensus forecast, as well as market pricing. The decision was unanimous, which we view as an important positive for the credibility of Chair Warsh and the FOMC more broadly. In our view, the Fed’s reaction function is finally becoming more transparent.
The post-meeting statement contained only limited changes, portraying solid economic growth and a labour market operating at full employment, while inflation pressures remain elevated.
Three aspects of the press conference and of the Summary of Economic Projections (SEP) contributed to a distinctly hawkish tone. First, we learned that Warsh's assessment at Jackson Hole that broad financial conditions were not restrictive was "widely shared” by the Committee.
Second, Warsh characterised yesterday’s rate increase as "removing a dose of accommodation." This wording implies that the policy stance remains at least somewhat accommodative even after the latest hike and the recent, meaningful, upward shift in the yield curve. In other words, the FOMC agrees that current financial conditions are not exerting sufficient restraint on inflation. This strengthens the case for further tightening if inflation risks fail to recede.
Third, the updated SEP showed the dot-plot shifting higher amid forecast revisions that were generally small but uniformly tilted in a hawkish direction. The FOMC marginally upgraded its assessment of economic growth and labour market conditions, while also slightly revising higher its projections for both headline and core PCE inflation. Taken together, the revised forecasts and the prevalence of upside risks to inflation suggest a higher degree of inflation persistence and greater confidence in the economy's ability to absorb additional tightening.
The distribution of rate projections shows that sixteen of the eighteen participants - similarly to June, Warsh did not submit his own dot - expect at least one additional rate hike by year-end. As for 2027, a majority of participants expect rates to be unchanged or lower, but eight participants envisage an additional rate increase to 4.25-4.50%.
Adding to the hawkish tone, in the press conference Warsh sounded resolute in his commitment to bringing inflation under control and avoiding a broadening of inflationary pressures as the energy-driven inflation shock risks becoming embedded in wages, pricing behaviour and inflation expectations.