The September meeting
The vote for the rate hike passed unanimously.[3] The reasoning was articulated by Chairman Kevin Warsh in the press conference: “The plain fact is that inflation is too high and has been for too long.” He also reiterated his Jackson Hole thesis, stating that he “would be hard pressed to describe broad financial conditions as restrictive.”[4]
The meeting minutes, released on October 7, add further texture. “Many” participants pointed out the risk of prolonged high energy prices to broader price pressures. “Several” viewed the current policy rate as “not restrictive or only mildly restrictive,” in the same spirit as Warsh, and “a couple” even raised their estimate of the neutral rate.[5]
The SEP (Summary of Economic Projections) underscored this trend in thinking, with a more hawkish view on the path of future rates compared with the June projections.
The median target for end-2026 rose from 3.8% to 4.1%, with 16 of the 18 participants who submitted projections pencilling in at least one hike this year. The median for 2027 implies the rate will be 4.1% at the end of next year, although eight of the 18 see rates higher still by the end of 2027 and four see them lower.[6]
The data
The figures available to the Federal Reserve at the time of the last meeting were indeed concerning, both in terms of level and persistence. Core PCE was recorded at 3.3% for July, compared with 3.3% and 3.5% in the previous two months.[7] However, on September 30, the BEA published its annual update, which changed how the prices of portfolio management fees, software and legal services are measured within the PCE index.[8]
July’s Core PCE was revised down to 3.0%, and August to 3.0% as well.[9] Hiring was also revised down, with August payrolls cut from +162,000 to +133,000 and July from +21,000 to -10,000, while September added only 29,000 jobs.[10] These new data support the view that the labor market is not overheating and may remain vulnerable.
On the other hand, GDP growth for the second quarter has been revised up from a modest 1.5% to a more bullish 2.2%. The personal saving rate for July was also revised upwards from 3.0% to 4.6%.[11] Neither of these implies an economy that is under pressure.
Importantly, the minutes record that the Fed staff had already re-estimated August inflation under the BEA's new method, at 3.2% for core PCE rather than 3.4%, and Chairman Warsh himself put August core PCE at "about 3.2" percent in his opening remarks.[12] So the downward revision was not a shock.
One further fact remains unavoidable, and likely explains the Fed’s lean towards a hawkish policy. At 3.0%, core PCE inflation remains a full percentage point above target. The Fed Chairman has made it plain on multiple occasions that this is not acceptable as the new status quo.[13]
Source: Bureau of Economic Analysis; Bureau of Labor Statistics.
Conclusion
Expectations of a further hike in October reached about 70% a week after the September decision.[14] Since then, the Fed’s own dot plot, the revised economic data and comments by Fed officials indicating a more sedate pace have pushed the next expected hike to December.[15]
The most recent inflation data available to the committee will be the September Core CPI, released on October 14. This month’s reading rose 2.6% on the year, above the Cleveland Fed's nowcast of 2.4%.[16][17]
Chairman Warsh has gone to great lengths to assure the commentariat that he is “not in the forward guidance business.”[18] This evidently does not stop the market from joining the dots - literally - despite his declining to contribute projections of his own.[19]
It does, however, leave Warsh’s options open, in a way that the word ‘transitory’ did not.[20]
Governor Waller’s speech of October 8 illustrates this more flexible approach. While acknowledging that inflation is still too high and that therefore further hikes are possible, he also noted that "there is some flexibility about when those hikes will occur. The hikes do not need to come at consecutive meetings, but they should be in place in an acceptable period of time."[21]
Stepping back from all this, the gyrations of the markets are, in our view, a testament to the imperative of a long-term approach to investing. While market sentiment moves fast, fundamentals move slowly, and are sometimes, as a result, more easily ignored.
[7] Bureau of Economic Analysis
[8] Bureau of Economic Analysis
[9] Bureau of Economic Analysis; Revised series
[10] Bureau of Labor Statistics
[11] Bureau of Economic Analysis; Bureau of Economic Analysis; revised serie
[12] U.S. Federal Reserve; U.S. Federal Reserve
[14] New York Times; implied by fed funds futures (CME FedWatch methodology), 23 September close.
[16] Bureau of Labor Statistics
