The Fed has raised interest rates by a quarter of a percentage point on September 17th, as expected by Wall Street.
The big surprise was what happened next. Fed policymakers have signaled that more rate hikes are possible before the end of the year and if stubborn inflation does not ease.
reason? Central bank officials are struggling to bring stubborn inflation back to their 2% target, a mission that remains unfulfilled after more than five years.
The unanimous 12-0 Federal Open Market Committee decision raises the Fed’s benchmark federal funds rate to a range of 4% from 3.75%.
This marks a renewed push for monetary policy tightening in response to sustained price pressures driven by rising energy costs due to the Iran war and related economic and geopolitical shocks.
“Price stability is fundamental to economic growth, and I think today we took an important step toward achieving that,” Federal Reserve Chairman Kevin Warsh said in a shortened press conference after the statement was released.
The Fed’s rate hikes have ripples throughout the financial system, with the most immediate pressures hitting short-term borrowing such as variable-rate credit cards and student loans.
Indirectly, it affects fixed-rate mortgage rates, which depend on Treasury yields plus corporate bonds and capital expenditures.
An increase in yields across the Treasury curve would significantly increase net interest payments on the $40.1 trillion of total U.S. debt.
By the way, the White House and markets are not happy with the Fed’s decision to raise rates or the signal for at least one additional rate hike.
Dot plot suggests further rate hikes this year
quarterly dot plot forecast, or Economic forecast overviewThe report, also released on September 16, showed that 16 out of 18 participating policymakers expected at least one additional rate hike by the end of the year.
Melissa Brown, head of global investment decision research at SimCorp, said if oil prices remain high and volatile, the Fed will likely be forced to raise rates again.
“With one more rate hike projected on the dotplot this year, the Fed acknowledges that it needs to act, even if it has little effective control over the supply-side nature of rising inflation. But in this case, “Fed” is not Warsh’s synonym. Because he still refuses to make any predictions, dot or otherwise,” Brown told TheStreet in an email.
Bill Birmingham, managing director at Rex Financial, agreed that Mr. Warsh was not suggesting what path the central bank would take, but added that policymakers “may not be an active enough chorus within the Fed theater to match market preferences.”
“I think people felt there were more silent hawks at the Fed,” he said in an email. “Despite this rate hike, it overall feels more tentative than many would like.”
“The deadline for achieving the 2% core inflation target has been pushed back to 2029,” Birmingham said. “The fact that governments are acknowledging that the fight to meet their obligations will take longer than expected is sobering news, even if it is just an early estimate.”
Warsh’s interest rate outlook is more hawkish
Warsh said in the weeks since the July FOMC meeting, which voted 9-3 to keep interest rates on hold, that the summer trends showed “too many categories” with six- and 12-month price increases of more than 3%, thus indicating that underlying inflation was not progressing toward the central bank’s target.
“The plain fact is that inflation is too high,” Warsh said, adding that most global economies were facing price pressures.
He noted that labor risks remain stable.
“You can’t influence individual prices,” Warsh said, citing food and oil as examples.
“But what we can do, and what we are trying to do, is to ensure that changes in relative prices do not spread and have second- and third-order effects on the economy,” he said. “That’s our mission and that’s what we do.”
Traders expect a second rate hike by December
Following the Fed’s first interest rate hike since 2023, CME Group FedWatch Tools We are pricing in a roughly 50-50 chance of an October rate hike, and an 88.5% chance of another 25 basis point hike by December.
Traders raised their expectations for a September rate hike to over 90% after August’s CPI report showed a rise in headline CPI Core CPI was 0.4% m/m, 3.4% m/m, and 0.3% m/m.
President Trump repeats calls for interest rate cuts
President Donald Trump blown up In his Truth Social posts, he mentioned the Fed’s interest rate hikes, but carefully avoided attacking his hand-picked Fed chairman, George Warsh.
Mr. Warsh’s predecessor, Jerome Powell, was repeatedly verbally attacked personally and professionally by the president and his allies for failing to lower interest rates below 1%. Trump unsuccessfully tried to remove Powell from office, but the Supreme Court invalidated the move.
Related article: Goldman reverses Fed rate hike, then withdraws forecast
After the Fed rate hike on September 16th, President Trump wrote:
“US interest rates should be below 1%, because the US is by far the best credit in the world. The US is booming with new investment! If we stopped trade with all countries with deficits, if we stopped trade with most countries, we would gain at least $1.5 trillion a year… Lower US interest rates, and fast!”
In his post-FOMC press conference, Warsh repeatedly deflected questions about possible communication between the president and Trump.
U.S. Treasuries react to Fed rate hike
Following the Fed’s decision to raise interest rates:
- The yield on two-year U.S. Treasuries rose to about 10%. 4.72%-4.74%up about 6-7 basis points, reflecting increased policy sensitivity following the rate hike.
- 10-year US Treasury yields remain in the vicinity 5.00%which fell after Warsh’s remarks and remains near multi-year highs.
“Bond traders share the view that interest rates are too low given core PCE, and we are relieved to see some action towards that end in the initial features, which is long overdue,” Birmingham said.
But he added: “The market has combined with the post-press conference decline to suggest that traders may not fully believe Mr. Warsh’s belief that a path to 2% core inflation can be achieved with just two rate hikes.”
Markets react to future Fed rate hikes
As my colleague Charlie Blaine pointed out, stocks reacted badly to rate hikes, and perhaps to the prospect of further rate hikes.
The Standard & Poor’s 500 Index fell 78 points, back to around 7,500. 7,551.81.
The Dow Jones Industrial Average fell more than 800 points. 51,461.90.
The Nasdaq Composite Index fell just 3 points to end at 25,979. 25,978.42; it was up as much as 243 points before the Fed meeting.
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