Wall Street Lunch: Fed Hikes And Isn't Done

The Federal Reserve raised interest rates by a quarter point to 3.75%-4%, as predicted by the market, saying it would support a “timelier” return to 2% inflation. It was the first hike in three years . The FOMC vote was unanimous, contrasting with July’s hold, which saw three dissents.

Economist Justin Wolfers says markets will be happy that Fed Chairman Kevin Warsh “has decided to signal he's more of a Serious Kevin than a Sockpuppet Kevin (which was their main concern)."

The Summary of Economic Projections, or dot plot, indicated this won’t be a one-and-done hike. Sixteen of 18 officials expect at least one more quarter-point rise this year , with four penciling in a total of 75 basis points of hikes for the year. Warsh again skipped adding his dot. Fed funds futures now price in more than an 80% chance rates move up again before 2027, and Treasury yields popped on the shorter end of the curve. Strategists flagged the Fed’s median expectation for unemployment to stay at the current 4.1% all the way through 2029.

At his press conference, Warsh said three things had changed since the hold in July: the economy has strengthened, as demonstrated by jobs figures; inflation is trending away from the 2% target; and “there’s no hiding from hotspots around the world.” Warsh said the FOMC had removed a dose of accommodation . Renaissance Macro noted that “if you ‘remove a dose of accommodation’ it implies that you don't believe policy to be restrictive.” “That implies there is more work to do. That was Warsh today. Compare and contrast to (Fed Governor Chris) Waller who recently called the stance of policy mildly restrictive.”

Warsh also dismissed questions on President Trump’s call for lower rates, but the White House later said the rate hike was “unfortunate.” Warsh ended his press conference in a tidy 30 minutes, but the markets seemed like they wanted more and left with a hawkish impression. Stocks sold off in the last hour of trading , while yields extended their rise. The major indexes ( SP500 ) (COMP.IND) ( DJI ) slumped from a peak around 15 minutes wrapped up. Financials ( XLF ) took it on the chin the most. The 2-year yield ( US2Y ) rose back above 4.7% and the 10-year ( US10Y ) was above 5%. Another big move came in the greenback, with the dollar index ( DXY ) up back above 100 and testing late-July levels .