This was a hawkish meeting, with a unanimous vote for a hike and more hikes indicated.

By Wolf Richter for WOLF STREET.

With Fed Chair Warsh presiding over his third “good family fight,” as he likes to call these meetings, the 12 voting FOMC members voted unanimously for a 25-basis-point rate hike, bringing the Fed’s policy rates to 3.75-4.0%.

The bond market had been loudly clamoring for a rate hike, had priced in a rate hike, and was ready for a rate hike, and would have been shocked if no rate hike had come, and yields might have spiked further. But the rate hike soothed some ragged nerves, and bond yields declined.

In recent decades, the Fed has hiked in a series of rate hikes before switching to rate cuts. The last time it hiked only once – a single-rate-hike cycle – before cutting again was in March 1997. So if history has any suggestions to make here, it would indicate that this is the beginning of a new rate-hike cycle, and not a one-and-done.

The statement, under new the rule of eschewing “forward guidance,” was sparse. It was primarily worried about inflation, and less worried about the economy and labor market. That shift had started in March under Powell.

Other than the results of the vote, here are the remaining changes from the July statement:

New: “Economic activity is expanding at a solid pace. While uncertainty remains elevated owing, in part, to geopolitical developments, domestic spending has been resilient. Productivity growth is strong, and capital investment is robust. Job gains have kept pace with the workforce, and the unemployment rate has changed little.”

Old: “Economic activity is expanding at a solid pace despite elevated uncertainty that owes, in part, to the conflict in the Middle East. Productivity growth and capital investment are strong. Job gains have kept pace with the workforce, and the unemployment rate has changed little.”

New: “Inflation remains elevated. Today’s policy action will support a timelier return to the Committee’s 2 percent goal. The Committee will deliver price stability.”

Old: “Inflation remains elevated relative to the Committee’s 2 percent goal, in part reflecting supply shocks that have driven price increases in certain sectors, including energy. The Committee will deliver price stability.”

The Dot Plot hangs on without Warsh.

The dot plot is part of the “Summary of Economic Projections” (SEP), which the Fed releases four times per year. The SEP is an official act of forward guidance, released despite Warsh’s efforts to squash forward guidance. Warsh had put the Dot Plot on death-watch at his first meeting by not submitting his own projections, and that continued. “I’m not in the forward guidance business,” he said at the press conference today. So 18 participants instead of 19. And it turned very hawkish.

Of the 18 dots, 12 participants saw 1 additional rate hike by year-end, which became the “median projection”; and 4 participants saw 2 more hikes; so 16 saw at least one more rate hikes this year:

• 4 see 2 more hikes
• 12 see 1 more hike
• 4 see no change
• 0 see rate cuts.

Inflation projections in the SEP:

• Headline PCE inflation by the end of 2026 rose to 3.7% from 3.6% in June, comes down to 2.3% by the end of 2027.
• “Core PCE” inflation by the end of 2026 rose to 3.4% from 3.3% in June, and comes down to 2.5% by the end of 2027.
• Not hitting the 2.0% inflation target till 2029.
• Federal funds rate rose to 4.1% for the end of 2026, and also to 4.1% at the end of 2027.
• “Longer-run” (beyond 2029) projections for the federal funds rate rose to 3.2%.
• GDP growth projections for 2026 accelerated to 2.3% from 2.2% in June. For 2027, it accelerated to 2.4%.
• Unemployment rate projections declined to 4.1% for the end of 2026, a historically low unemployment rate, and remained there past 2029.

At the press conference:

Why now and not in July:

“What transpired in the seven weeks since we last met? … I will highlight three things that happened in that intermitting period.

“One is I made a judgment seven weeks ago about the strength of the economy. There has been a pretty wide-ranging set of data, including the labor markets that the economy has strengthened….

“Second, inflation trends. My judgment some weeks ago was the inflation summer trends weren’t passing the test. I have seen very little information since that would make me reverse that decision, so I have stuck with it.

“The third thing that has changed in seven weeks are geopolitics. There is no hiding from hot spots around the world, and our judgment about what is the most likely, or least likely of the geopolitical situation has changed.

“All three of those things helped themselves to a firm, unanimous decision today.”

“Inflation is the problem”

“My suspicion when I showed up was that the US economy was strengthening. Even other the last several weeks we have data broadly defined that says the economy has, indeed, strengthened. Underlying growth is higher.

“Inflation is the problem. Stable prices have been the problem for now more than 5.5 years. So what the Committee decided to do today was take action to ensure a timelier return to our price stability objective.

“Price stability is foundational to economic growth, and I think we took an important step today to deliver it. We did it in part by removing the dose of accommodation.”

Why have bond yields surged recently?

“First is economic strength. Part of the reason we have seen over the course of 2026 long-term yields go up is the economy has strengthened.

“The second reason, the competition for capital. The surge in expenditures which I referenced in my remarks is real, and the so-called hyperscalers are out in the market raising funding, so the competition for capital is real, and it partly explains the increase in yields.

“The third is geopolitics. The hot spots around the world are driving long-term yields. It is not simply spot prices of energy… but it is the difference between those spot prices and so-called crack spreads.

“So, I think those are the three leading explanations, but certainly not an exclusive list.”

But that sigh of relief in the bond market was brief.

While Wash was talking at the press conference, bond yields did a 180 and began to rise again, undoing the entire drop. The 10-year Treasury yield is now back at 5.0%.

Stocks also started sliding when he was talking, and are now deeply negative. Warsh sounded really hawkish, despite eschewing forward guidance. And the hawkish dot plot without Warsh didn’t help.

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