(Kitco News) – The Federal Reserve may be leaning more hawkish than recent Fedspeak seemed to suggest, and yesterday’s rate hike could be followed by another before the year is out, according to Natixis.
In their latest note, economists Christopher Hodge and Selin Aker characterized yesterday’s decision by the FOMC to raise rates for the first time since 2023 as “the path of least resistance.”
“Staying on hold would further risk credibility and 50 might be overkill and tie the Fed’s hands in the coming months,” they said. “This move will do very little to actually address inflation, but it will buy the FOMC time to see if the higher-than-expected print in August was just a bump in the road or something more worrisome.”
“We think it’s possible this is a one-off, which would be unusual, but hiking into disinflation is itself unusual,” they noted. “Because it is hard to string together several encouraging inflation prints, we will pencil in another hike in December, but this could be one-and-done. We don’t think policymakers will think more than a nudge would be needed to help the disinflationary process, but incoming inflation prints will continue to be decisive.”
The economists pointed out that the official statement included the phrase “Today’s action will support a timelier return” to the Fed’s 2% inflation target. “On net, this should be viewed as dovish as it suggests the FOMC sees today’s move as not insignificant,” they said.
Turning to the Summary of Economic Projections, Hodge and Aker said the SEP indicates that most FOMC members expect another hike will be needed in 2026. “Chair Warsh did not submit his projections once again because of his disbelief in forward guidance, however, there are now sixteen participants expecting another hike by the end of the year, with the median dot showing no change in 2027 and a cut in 2028, though the dispersion of the dots was notable,” they wrote.
As for Fed chair Kevin Warsh’s press conference, the economists said there was little to note, and that its brevity would probably be the standard going forward. They noted Warsh’s statement that “I would be hard-pressed to describe broad financial conditions as restrictive,” saying “we removed a dose of accommodation.”
“This last bit, about removing accommodation, is key, suggests that Warsh feels the policy rate was accommodative and not, as Governor Waller has suggested, “moderately restrictive,”” Hodge and Aker said. “We think that Waller is likely closer to the mid-point of the Committee, but if Warsh represents most voters, that suggests that more, rather than fewer hikes could be on the way.”
Going forward, Natixis believes the Fed “will remain fixated on incoming data prints […] and as last Friday’s CPI report shows us, month to month data can be noisy and it is difficult to string together a series of better prints.”
“For that reason, we will pencil in another hike in December or January as well.”
