The Fed joins the hiking camp

The September rate hike validates the hawkish shift underway since Jackson Hole. We see another hike by year end.

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Summary

The Hike Arrives: The FOMC raised the Fed Funds rate 25 bp to 3.75 – 4% at the September meeting, in line with market expectations and validating the hike camp we have occupied since early June. The SEP aligned with the move – 2026 growth was revised up to 2.3%, core PCE to 3.4%, and unemployment down to 4.1%, with the median dot at 4.1% implying one more hike before year end.
Warsh Stays on Message: The chairman reiterated his Jackson Hole framing – a healthy economy, a balanced labor market, and inflation that remains too high. He stressed that too much of the consumption basket is seeing uncomfortably large price increases. Geopolitics also earned a mention, a reminder that commodity moves since the Iran war began (oil +50%, diesel +100%, wheat/corn +20%) are squarely on the committee’s mind.
We Turn More Hawkish: Following today’s move, we update our long held one-hike call and now forecast another hike this year plus an additional hike early next year before the FOMC pauses to assess. Markets lean the same direction for now. Futures pricing has an 88% chance of at least one more hike in 2026. The 2y bond yield pushed above 4.7% for the first time since July 2024.

Market Analysis

Since early-June of this year, we have firmly resided in the “hike” camp for the Federal Reserve in 2026. A surge in energy-related inflation following the Iran conflict, which threatened to de-anchor inflation expectations, alongside a healthy US economy, helped along by robust AI capex, and a resilient household consumer, was the basis of our forecast. At the September 16th FOMC meeting, the committee finally decided to raise the benchmark Fed Funds rate by 25bp to a range of 3.75 – 4%, in line with market expectations heading into the decision.