The FOMC voted unanimously to raise rates by a quarter of a percentage point, to 3.75–4.0%, at the conclusion of its September meeting, in line with market expectations.
Inflation concerns have been reaccelerating, with Fed chair Kevin Warsh specifically calling out “geopolitical developments” contributing to uncertainty as the Fed attempts to balance its dual mandate of low inflation and low unemployment. The September statement also highlighted the strength of the economy in terms of domestic spending, productivity growth and capital investment, as well as job gains and low unemployment.
“Today’s policy action will support a timelier return to the Committee’s 2% goal (for inflation),” the statement read. “The Committee will deliver price stability.”
The quarter-point raise was in line with forecasts from J.P. Morgan Global Research, which called for a quarter-point hike in September. “The case for a hike is simply that core PCE inflation has been above 3% every month this year and has made little recent progress heading toward 2%,” said Michael Feroli, chief U.S. economist at J.P. Morgan, referring to the Fed’s target for inflation. “The Chair’s repeated stern warnings on inflation intolerance [risked] institutional credibility absent some action to back it up.”
J.P. Morgan Global Research sees the Fed raising rates once more later this year — a call that is consistent with the “dot plots” that Committee members fill out, telegraphing what they expect to be the path of rates going forward.
“For our part, we continue to look for one more hike at the December meeting, in line with the revised median FOMC expectations,” Feroli said. “Setting aside the midterms, a credible case for passing [on another hike] in October is that it takes time to observe the effects of the hike on the economy.”
However, this is unlikely to mark the beginning of a longer hiking cycle. “Inflation continues to look supply-shock-driven, and as such we don’t foresee a protracted hiking cycle extending into next year,” Feroli added.