Warsh Delivers 25 bps Hike, Markets Deliver a Collective Shrug 🫡

The U.S. Federal Reserve raised its benchmark federal funds rate by 25 basis points to a target range of 3.75%-4.00% on Wednesday, marking the central bank's first hike since July 2023. The unanimous vote by all 12 members of the Federal Open Market Committee lifted the range from 3.50%-3.75%, where it had held steady since the July meeting, when the decision passed by just a 9-3 margin. In its policy statement, the FOMC said "economic activity is expanding at a solid pace" and that the move would support a "timelier return to the Committee's 2 percent goal," reiterating that "the Committee will deliver price stability."

The hike was widely priced in. Heading into the decision, CME's FedWatch tool showed traders assigning a 93% probability to a 25 bps move, up from under 50% a month earlier. The case hardened after August inflation data: the Producer Price Index rose 5.4% annually, accelerating from 4.8% in July, with goods prices up 1.1% on the month, more than three-quarters of it from rising energy costs, according to the National Association of Manufacturers. A day later, the Consumer Price Index showed annual prices up 3.4%, matching July, but a monthly gain of 0.4% versus 0.1% previously, with gasoline responsible for a third of that increase. Core inflation ticked up to 0.3% monthly from 0.2%. Oil trading above $100 a barrel for the first time since July, tied to fallout from the conflict with Iran, added further pressure.

At his post-meeting press conference, Fed Chair Kevin Warsh said "the economy has indeed strengthened" and "inflation is the problem." Asked about President Donald Trump's reaction, Warsh declined to comment, repeating his Jackson Hole refrain: "We will deliver price stability. We're committed to a discipline, not a decision." Trump had previously said he would "put somebody that wants to cut rates" while also encouraging Warsh to be "independent." On artificial intelligence, Warsh said "the policy decisions on AI are made by other parts of government," adding that the Fed would focus on AI's "implications on the demand side of the economy."

The FOMC's updated "dots" signal an expectation for one more rate hike before year-end, a view echoed by a Wall Street Journal survey of major banks. Barclays, Citigroup, JPMorgan, Morgan Stanley and UBS forecast 50 basis points of total tightening by year-end; Bank of America, Deutsche Bank and RBC projected 75 bps. Goldman Sachs and Piper Sandler, which had previously expected the Fed to stand pat, switched to expecting a hike after the August inflation prints, according to Reuters.

Bitcoin ($BTC) traded near $75,700 in the minutes before the announcement, swinging between $75,000 and $75,800, before spiking to about $76,000 shortly after. It later pulled back to roughly $75,500, down about half a percent on the day, while the broader crypto market lost around 2.18%. U.S. stocks continued modestly higher and bond yields were slightly lower. The Fed has now confirmed what the curve had already told you: one and done is officially off the table.