FOMC Watch – Not restrictive yet

In the projections, which contained forecasts from all but Fed Chair Warsh, inflation forecasts were revised up by 0.1pp, while the forecast ranges naturally narrowed. Unemployment projections saw small downward revisions and GDP forecasts were revised moderately higher. More interestingly, the dot plot strongly points to another hike this year: 12 participants expect one additional increase, four expect two more hikes, and two see rates remaining at their current higher level. Dispersion is much greater further out. For end-2026, eight participants see a cumulative 75bps of tightening, six see 50bp, and four expect enough disinflation to allow substantial easing. The median long-run policy rate edged up from 3.1% to 3.2%. Given the degree of dispersion and uncertainty, there is no strong signal here, but it is consistent with our view that private-sector stimulus from the AI investment boom has pushed up the Fed's neutral rate, at least for now.

In his opening remarks, the most important line was: "We removed a dose of accommodation." That is notably stronger than his earlier comment that he was "hard-pressed" to describe financial conditions as restrictive. It suggests he believes the policy rate was still below neutral prior to this meeting, and perhaps still. That is not merely hawkish by Warsh's standards; it sits well toward the hawkish end of the FOMC spectrum. Beyond that, he noted a lack of sufficient progress on inflation, again highlighting the number of categories running at annualised rates of 3% or more over six- and twelve-month horizons. The FOMC concluded that underlying inflation was not moving toward target "clearly and at sufficient speed."

During the Q&A, he cited a strengthening economy and labour market, inflation developments, and a less optimistic assessment of geopolitical tensions as reasons for a different decision than in July. He argued that rising 10-year yields reflect economic strength, competition for capital, and geopolitics, with the US budget deficit notably absent from the list. Asked how higher rates address supply-side inflation stemming from geopolitical shocks, he said the hike was intended to reduce the risk of second- and third-round effects, broadly in line with the mechanism we discussed in our preview. When asked whether this was effectively a market-led hike, given that markets had priced roughly a 90% probability of an increase, he insisted the decision was driven by the Fed's own analysis. Markets inform that analysis, but he does not share investors' fixation on individual data releases.

Rates have been raised, and we continue to expect another 25bps hike in December. What impact should we expect from such tightening? Probably not very much. We see these as insurance hikes: measures designed to reduce the risk that higher energy prices spill more broadly through the economy, rather than an attempt to materially slow demand.