Takeaway: The Fed hiked by 25 bps as expected and officially projected another hike this year, but Chairman Warsh’s remarks suggest more may be on the way.
The committee unanimously agreed to a hike today and projected another hike or two through 2027 but that may undershoot the reality as Fed officials seem to think that pressing the brakes on the economy requires a higher level of rates than they did previously.
- A 25 bps hike is not enough to move the needle. That’s why the Fed has only done a “one and done” hike once. Today’s hike was the first in a series. The question coming in was how many.
- In the official Summary of Economic Projections–the so-called “dot plot”–with eighteen forecasts submitted because Chairman Warsh abstained, twelve are looking for at least one more hike this year and eight are looking for another hike next year.
- The committee members signaled a general consensus that their estimate of the neutral interest rate–the level of rates at which the Fed is neither stimulating nor contracting the economy–has increased. While the “longer run” estimate for the Fed funds rate only increased from 3.1% to 3.2%, that part never moves very much and it’s more telling to see their revision for 2028 increase from 3.4% to 3.9%. Furthermore, in describing today’s action, Chairman Warsh said “We removed a dose of accommodation,” a shift from the Fed’s previous description of the level of rates as “at the high end of neutral”.
- Even without Warsh’s participation in the projection, his commentary in the press conference suggested his dot would have been on the high end. His characterization of the economy was “inflation risks are to the upside, while labor risks are roughly balanced.” And when asked about the committee’s projection that core PCE inflation won’t return to 2% until 2029, he said “those aren’t my projections” telegraphing the possibility that it will take more than what is in the dot plot.
Mortgage rates may bounce around as markets digest everything they learned today but will generally stay high for the foreseeable future.
- Rates will move as market participants rejigger their views on how many hikes to expect for the rest of this year and next as well as how committed the Fed is to finally bringing inflation back to the target.
- But until the underlying economic fundamentals—everything from oil prices to AI–that are keeping rates high change, mortgage rates are unlikely to fall significantly.
