- The Fed raised rates by 25bp to 3.75-4.00%. All members voted in favour. This was more hawkish than we expected, as we saw a risk that 2-3 members would favour unchanged rates.
- Warsh repeatedly highlighted the economy’s and labour market’s resilience, allowing the Fed to focus on bringing inflation back to target.
- We think the macro case for further tightening remains strong and maintain our call for 25bp hikes in both December and March.
- The UST curve flattened, while EUR/USD fell to 1.1470 from around 1.1540, which we think is justified.
We received the economic projections and ‘dots’, despite uncertainty given Warsh’s preference for less forward guidance. As in June, Warsh did not submit projections himself or comment on whether they would continue from here.
The dots show consensus for one more hike in 2026, in line with our expectation. For 2027, the median signals no further hikes, but 8/18 participants call for one more hike to 4.25-4.50%, in line with our call.
Growth projections were revised slightly higher to 2.3% in 2026 and 2.4% in 2027, from 2.2% and 2.3%, respectively. Inflation projections were broadly unchanged. Unemployment projections were lowered to 4.1% for both this year and next, from 4.3%. In the risk assessment, no participants now saw risks tilted towards weaker GDP growth or a weaker labour market anymore. This allows the Fed to focus fully on inflation risks, which nearly all participants see as skewed to the upside. The short statement was essentially unchanged, with only a minor addition being “domestic spending has been resilient”.
In his speech, Warsh repeatedly highlighted the resilience of the economy and labour market. He also repeated his Jackson Hole remarks that financial conditions do not seem restrictive.
This was in line with our point in this week’s RtM USD – The Fed to hike this week and beyond, 15 September. We have long argued that nominal growth would eventually push the Fed towards a tightening bias, which it now also sees unfolding. We think the macro case for further tightening remains solid.
The 2Y UST yield rose around 13bp after the rate decision and the press conference, with markets now pricing three additional hikes over the coming year. Our call remains 2x25bp in December and March. The UST curve flattened as the 10Y yield rose less.
EUR/USD fell to 1.1470 from around 1.1540, while the DXY index rose about 0.6% on the day. In broader G10 FX, SEK and NOK underperformed as tighter financial conditions weigh on the growth outlook. We think the market reaction makes sense, even if Fed pricing is starting to look hawkish versus our baseline. We expect EUR/USD to decline further over the coming year and target 1.12 in 12M.
