(Kitco News) – While the Federal Reserve is likely to deliver the first rate hike of the Warsh era at the conclusion of tomorrow’s FOMC meeting, it may also be the only hike of this cycle if price pressures moderate through the final quarter of 2026, according to Natixis.
Economists Christopher Hodge and Selin Aker wrote in Natixis’ FOMC preview that they believe Fed Chair Kevin Warsh will announce the ‘nudge’ of a rate hike to encourage disinflation.
“We expect the Fed to raise its policy rate to an upper bound of 4.0%, marking its first rate increase in three years and the first in the Warsh era,” they said. “We expect minimal, if any dissents, though it is possible that those voters who wanted a hike in July (regional presidents Logan, Hammock, and Kashkari) will dissent in favor of a jumbo 50bp increase.”
The economists said that core CPI coming in above expectations effectively cemented expectations of a rate hike. “Policymakers appear to be less tolerant of those ‘one-offs’ now and despite being propped up by some factors out of the Fed’s control, above target inflation is the Fed’s problem and policymakers have increasingly signaled that ‘enough is enough,’” they wrote. “Chair Warsh was clear about his dissatisfaction with the pace of disinflation when he spoke at Jackson Hole in August and the most recent CPI data provides the impetus to pull the trigger on a hike after his hawkish rhetoric.”
“While Warsh’s broader reaction function remains somewhat uncertain, he did make it clear that it was the Fed’s job to hasten disinflation and the policy rate was the tool that would be used, if and when it was necessary.”
Turning to the Summary of Economic Projections, Hodge and Aker said they expect few material changes. “One change we do expect is for the end of 2026 policy projection to bump up to 4.1%, suggesting the median dot will pencil in another hike by the end of this year,” they said. “But any signal from the median dot we expect to be blunted by the wide dispersion, suggesting many possible paths for the policy rate in the coming years.”
As for Warsh’s press conference, the economists expect the Fed chair will once again offer little to no guidance on future moves. “We expect that he will frame the hike as a way to ensure that inflation returns to target in an acceptable timeframe,” they wrote. “We also think that he will emphasize that this decision was discrete and does not pre-commit the Fed to any actions in subsequent meetings, giving him and the Committee maximum flexibility to respond to shocks.”
On the question of whether further rate hikes may be in store, Hodge and Aker said to focus on the coming months’ inflation data.
“Because we think those data will be encouraging, it is quite possible that this meeting is a one and done — the lone hike of the cycle,” they wrote. “That would be unusual though. Usually when the Fed feels the need to hike rates, they will typically do it multiple times to really tamp down price pressures. But this is not a typical cycle. The broader trajectory of inflation is still intact — the year-on-year numbers did come in lower than in the prior month, after all. It’s just that the process is not happening fast enough and therefore the Fed feels that a nudge — via just one adjustment higher to the policy rate — could be helpful.”
