Institutions comprehensively interpret Federal Reserve policy stance, say one more rate hike expected this year

Fxstreet, September 18—— Natixis economists Christopher Hodge and Selin Aker analyzed in a research report that the latest rate hike by the Federal Reserve is the policy option with the least resistance, with limited effect in curbing inflation, and only buys some time for observation. The dot plot shows that most officials predict there will be another rate hike this year. Fed Chairman Warsh’s judgment about policy conditions differs from some committee officials; the bank believes the Fed will continue to closely monitor inflation data, and there is a possibility of another hike in December or January next year.

Natixis’s research suggests that the Fed’s policy stance may be more hawkish than signals conveyed by recent speeches from officials, and the rate hike implemented this time does not mark the end of the current hiking cycle, meaning there could be more increases before the year ends. Economists Christopher Hodge and Selin Aker provide a comprehensive interpretation of the FOMC's decision, policy statement, and economic projections dot plot in their latest report, analyzing the Fed's current policy thinking and the subsequent path for rates.

This Rate Hike Is the Path of Least Resistance, but Its Substantive Impact on Cooling Inflation Is Limited

Christopher Hodge and Selin Aker believe that the FOMC's move to raise rates for the first time since 2023 is essentially a choice with the least resistance. The two economists argue that maintaining rates would further damage the Fed’s policy credibility; while a single 50bp hike would be too aggressive and would constrain the Fed’s room for future policy maneuvers in the coming months.

They note that this rate hike is unlikely to fundamentally solve inflation, but gives the FOMC some time to observe whether August’s higher-than-expected inflation readings are just short-term volatility or signal deeper hidden risks of a renewed inflation surge. The two economists also mention that it is rare for a tightening cycle to end with just one final rate hike, and it is also unconventional to continue hiking during a period when inflation is already falling. Given the difficulty of continuously posting positive inflation data, they include the possibility of another rate hike in December as their base scenario—but do not rule out that this hike could be the last of the current cycle. Policymakers are likely to believe that only minor adjustments to rates are needed to push inflation down, and subsequent inflation data will be the core basis for Fed policy decisions.

Policy Statement Contains Both Hawkish and Dovish Signals, Dot Plot Suggests Room for More Hikes This Year

This Fed policy statement contains a phrase saying, “This action will help bring inflation back to the Fed’s 2% target in a timely manner.” Hodge and Aker say that, overall, this sentence is dovish and shows the FOMC acknowledges this hike has a substantial effect.

Regarding the summary of economic projections, these two economists highlight that the summary suggests most FOMC members expect another rate hike in 2026. Fed Chairman Kevin Warsh, having not endorsed the forward guidance mechanism, once again did not submit a personal forecast.

Chair’s Press Conference Highlights Key Divergence, Major Difference Exists in Policy Tightness Judgment

Regarding Fed Chair Kevin Warsh’s press conference, the two economists believe it offered few highlights, and that the brief format could become the new norm. During the briefing, Warsh said it is difficult to describe overall financial conditions as restrictive, and the latest hike only partially reduces accommodative policy.

Hodge and Aker believe that “reducing the degree of accommodation” is the core takeaway from this event. This implies Warsh believes that current policy rates remain in an accommodative range, while Governor Waller views them as “modestly restrictive”—a totally different judgment. The two economists believe Waller’s view is closer to the Committee’s median stance, but if Warsh reflects most voting members’ thinking, further hikes will likely exceed market expectations.

Conclusion

Natixis expects the Fed to continue closely watching all economic data when setting future policy. As last Friday’s CPI showed, monthly inflation figures are highly volatile, making it difficult to record a series of consecutively positive inflation readings. Based on these characteristics, Christopher Hodge and Selin Aker include another rate hike in December or January next year in their scenario analysis. There is no unified view within the Fed on whether monetary conditions are currently tight or loose, and the trajectory of inflation data will continue to dictate whether the Fed hits the hike button again this year.