Research from Natixis suggests that the Federal Reserve's policy stance may be more hawkish than recent public statements from officials have indicated. The implemented rate hike does not signify the end of this rate hike cycle, and further rate hikes before the end of the year are possible. In their latest research report, Natixis economists Christopher Hodge and Selin Aker provide a comprehensive analysis of the Federal Open Market Committee's (FOMC) rate hike decision, policy statement, and dot plot of economic projections, dissecting the Fed's current policy considerations and the future path of interest rates.

This interest rate hike represents the option of least resistance, but its actual effect on cooling inflation is limited.

Christopher Hodge and Celine Aker stated that the Federal Open Market Committee's (FOMC) first rate hike since 2023 represents the policy option with the least resistance. The two economists analyzed that maintaining the current interest rate would further damage the Fed's policy credibility; a 50-basis-point hike would be too aggressive and would restrict the Fed's policy maneuvering in the coming months. They stated that this rate hike is unlikely to fundamentally solve the inflation problem, but it provides the FOMC with observation time to determine whether the higher-than-expected August inflation data was merely a short-term, temporary fluctuation or a sign of a deeper, recurring inflation problem. The two economists also noted that a single rate hike ending the cycle is rare, and continuing to raise rates during a period of declining inflation is itself unconventional. Given the difficulty of consistently positive inflation data, they included a December rate hike in their baseline scenario, although they do not rule out the possibility that this rate hike might be the last one in this cycle. Policymakers likely believe that even a small adjustment to interest rates is sufficient to push inflation down, and subsequent inflation data will become the core basis for the Fed's decisions.

The policy statement contains both bullish and bearish signals, and the dot plot suggests there is still room for interest rate hikes this year.

The Federal Reserve's policy statement included a line stating that "this action will help inflation return to the Fed's 2 percent target level more promptly." Hodge and Ake noted that this statement, taken as a whole, is dovish, indicating that the Federal Open Market Committee (FOMC) acknowledges the substantial effect of this rate hike. Regarding the summary of economic projections, the two economists explained that it shows a majority of FOMC members believe another rate hike is needed in 2026. Fed Chairman Kevin Warsh, due to his disagreement with the forward guidance mechanism, again did not submit his personal economic projections. Currently, a total of sixteen participating officials expect further rate hikes this year. The median in the dot plot shows that interest rates will remain unchanged in 2027, with rate cuts not expected to begin until 2028. Furthermore, significant disagreements exist within the dot plot itself.

The chairman's press conference revealed key disagreements, with significant differences in judgments regarding the tightness or looseness of policies.

Regarding Federal Reserve Chairman Kevin Warsh's press conference, two economists believe the entire event lacked highlights, and a concise format may become the norm in the future. Warsh stated that it's difficult to describe the overall financial environment as restrictive, and this rate hike merely reduced some of the easing measures. Hodge and Ake believe that the phrase "reducing easing measures" was the core message of the press conference. This statement indicates that Warsh believes current policy rates remain in an accommodative range, while Governor Waller's view is that policy is "moderately restrictive"—two diametrically opposed judgments. The two economists judge that Governor Waller's view is closer to the committee's neutral stance, but if Warsh represents the thinking of the majority of voting members, subsequent rate hikes are likely to be more numerous than the market expects.

Conclusion

Natixis believes the Federal Reserve will continue to closely monitor economic data in its future policy decisions. As the Consumer Price Index (CPI) released last Friday showed, monthly inflation data is highly volatile, making it difficult to consistently achieve a series of positive inflation readings. Based on this characteristic, Christopher Hodge and Celine Ake have included a December or January rate hike in their forecast scenarios. There is no consensus within the Federal Reserve regarding the current monetary environment, and fluctuations in inflation data will continue to determine whether the Fed will press the rate hike button again this year.