One Hike Down. How Many to Go?

The Fed fires the starting gun… one move or the first of many?… why this cycle isn’t 2004… how to position your portfolio regardless of what’s coming As I write on Wednesday afternoon, the Federal Reserve has raised its benchmark rate by a quarter point, to a target range of 3.75% to 4% – its first rate hike since July 2023. The move itself was no shock. Heading in, futures traders had priced the odds above 92%, and even Wall Street’s hike skeptics had come around. What mattered more was everything around the decision. Starting with the vote itself, it was unanimous – and that’s noteworthy. Just weeks ago, this committee looked badly split – at the July meeting, three members who wanted a hike were outvoted. Today, even July’s doves fell in line. When a divided Fed suddenly speaks with one voice, that unity is itself a signal. And today, that signal leans hawkish. Turning to the dot plot, the Fed’s projections now point to at least one more hike this year, possibly two. That’s up from the lone hike its June forecast implied. Only two officials think the Fed is already done; four see two more hikes coming. The committee raised its inflation forecast, too, and doesn’t expect prices back to its 2% target until sometime after 2028. Clearly, this is not a Fed that thinks it’s finished. Finally, there was Fed Chair Kevin Warsh’s press conference – or what passes for a presser in the Warsh era. Longtime Digest readers know that I would routinely feature quotes from Fed Chair Powell that were substantive, or market moving. We can forget that. The new chair has turned the presser into a masterclass in saying nothing despite lots of words: no forward guidance, no hints about the next move, no meaningful answers to reporter questions – all by design. He called inflation “sticky” and the economy “solid,” then spent the better part of an hour gracefully declining the follow-ups. He didn’t even place his own dot on the dot plot. That’s less a complaint than a heads-up. In Warsh’s Fed, what actually matters now is the hard economic data between meetings and the official statement itself. The one concrete thing he conceded was a reporter’s point that no rate hike can reopen the shipping lanes keeping oil above $100. Turning to the market’s reaction, stocks initially popped when the dots showed only one more hike likely, but then gave it back as the reality of a still-hiking Fed set in. The Dow closed down about 630 points while the S&P and Nasdaq were off 0.45% and flat, respectively. The 10-year Treasury sits right at 5%, its highest spot since 2007. Now, with this hike behind us, we can turn our attention to the next question that Wall Street will labor over – is this a one-and-done or the first step of a longer climb? Let’s dig in. One hike, or the first of many? In one camp are the hawks, who argue a single hike does almost nothing against inflation this sticky. Former Cleveland Fed President Loretta Mester made the case in an interview on Monday: A single hike won’t suffice. I would imagine you’d want to front-load that, starting this year into early next year, and then pause to see how the economy reacts. You have to be forward-looking. In the other camp are the doves, led by Fed Governor Christopher Waller, who has signaled he’d rather hold rates where they are and give the economy room to breathe. So, which camp will win out? We lean toward “likely more” – and the reason is sitting in the oil market. As I write on Wednesday, Brent crude trades at $105 and West Texas Intermediate crude sits at nearly $102 thanks to shipping through the Strait of Hormuz that’s largely choked off. And here’s the bigger issue for the Fed: This surge above $100 is too recen...