The Federal Reserve rarely delivers one-off interest rate increases. When the US central bank raised interest rates for the first time in three years, it left Fed chairman Kevin Warsh facing a question: Are more rate rises to come?
“I'm not going to prejudge any future decisions we make,” he told reporters.
Updated forecasts released by the Federal Open Market Committee alongside its policy decision showed a large majority of policymakers are indicating one more rate increase this year. Traders anticipate the Fed to raise rates again in December after holding steady next month, according to CME Group data.
“The key question from here is no longer whether the Fed is willing to hike, but how far it will ultimately need to go,” said Noureldeen Al Hammoury, chief market strategist at Equiti Group.
“If inflation continues to surprise to the upside, the current 'dot plot' may prove to be a floor rather than a ceiling for the tightening cycle.” The dot plot refers to the quarterly projection the Fed releases that shows where each of the 19 members on the Federal Open Market Committee believe interest rates could go in the short term.
The yield on the benchmark 10-year Treasury rose more than 2 basis points to 5.025 per cent after Mr Warsh's post-meeting news conference. The two-year Treasury note yield, which closely tracks future Fed decisions, rose more than seven basis points to 4.74 per cent. Yields and prices move in opposite directions.
The Federal Reserve's most recent major rate-rising cycle occurred in 2022 to combat increasing inflation from an energy shock after Russia's invasion of Ukraine, post-Covid supply chain bottlenecks and the fiscal stimulus to support household income during the pandemic. Inflation at the time had peaked to more than nine per cent, and the Fed raised interest rates from near nil to the range of between 5.25 and 5.5 per cent during a period of about two years.
chief market strategist at Equiti Group
Fed officials have yet to bring inflation back down to their long-term 2 per cent target, and energy-driven supply shocks caused by the Iran war are bringing in new price pressures.
The central bank typically “looks through” energy-driven inflation on the assumption that the rising costs are only temporary, but oil's return to $100 a barrel and increased government borrowing led policymakers to vote 12-0 in raising interest rates on Wednesday.
Michael Pearce, chief US economist at Oxford Economics, said the latest decision was the Fed exercising risk management rather than a new series of tightening measures.
“We don’t think this is the beginning of another major tightening cycle and markets have too much tightening priced in over the coming year,” Mr Pearce wrote.
The updated Fed projections showed that while officials expect a higher-for-longer policy posture, they do not anticipate further rate increases next year before bringing the federal funds rate down to 3.9 per cent in 2028 and 3.6 per cent in 2029.
However, the Fed's dot plot should be viewed with a healthy dose of scepticism. It shows each individual FOMC member's most educated guess and does not guarantee the direction of future policy. Critics argue it has a poor track record and can mislead markets.
Mr Warsh, an opponent of the dot plot, disclosed that he did not submit his own projection this week. He also refrained from doing so in June.
The man charged with steering the Fed's rate-setting committee has adopted a communications strategy that involves giving markets few indicators on where he intends to go.
“I'm not into the forward-guiding business,” Mr Warsh said.
