The Fed hikes, and the dots say again

Yesterday morning this desk wrote that a decision priced at 92% was a confirmation rather than a decision, and that the information would be in the statement and the projections. That is where it was.

The Federal Open Market Committee voted 12-0 on Wednesday to raise the federal funds target range by a quarter point to 3.75% to 4%, its first increase since 2023 and the first under Chairman Kevin Warsh. The statement said inflation "remains elevated" and that economic activity "is expanding at a solid pace", and tied the move to a "timelier" return to the 2% target.

Unanimity is itself information. A first hike in three years, under a new chair, with a president who wants lower rates, could easily have drawn a dissent. It drew none, which tells the market the committee is not divided about direction, only about distance.

The distance is in the projections, and it is further than June. The median participant now sees the funds rate at 4.1% at the end of this year, up from 3.8% three months ago, which implies one more quarter-point increase at the two remaining meetings. American Banker reported that 16 of 18 participants expect at least one more hike this year, 12 of them one and four of them two.

The 2027 figure is the more consequential number. The median is 4.1% again, against 3.6% in June. In June the committee expected to be cutting next year; it now expects to hold. For anything priced off where rates settle rather than where they peak, that change matters more than Wednesday's quarter point.

The longer-run rate, the committee's estimate of neutral, edged up to 3.2% from 3.1%. It is a tenth of a point and easy to ignore, and it is the projection that bears most directly on the ten-year yield, which is ultimately a bet on where short rates rest over a decade.

The inflation forecasts explain why. The median for headline PCE inflation this year is 3.7% and for core 3.4%, both a tenth higher than June, while unemployment is projected lower at 4.1% and growth higher at 2.3%. A stronger economy with firmer inflation is the textbook case for tightening, and the committee has now drawn it.

Warsh used the press conference to lower the temperature around individual releases. "Trends matter. Data points are noisy," he said, according to American Banker, and he named the Middle East as a change since July: "There's no hiding from hotspots around the world." That is a chair telling markets not to trade each inflation print as a referendum on the next meeting.

The bond market's first response was to agree with him. The ten-year yield rose back above 5% after the decision, to 5.016%, and the two-year added more than seven basis points to 4.738%, CNBC reported; yields eased on Thursday. The front end moving more than the long end is the curve pricing a longer hold rather than doubting the policy.

The politics will not stay quiet. President Trump urged lower rates after the decision, the Guardian reported. A chair appointed by that president has just raised rates unanimously and signalled more. Whatever the relationship was expected to be, the committee's first real test of it went to the committee.