Hold Or Fold? Skipper Warsh & His Hawkish Crew

Authored by Philip Marey via Rabobank,

Summary

• We expect the FOMC to remain on hold in October. However, we are likely to see Hammack, Kashkari and Logan repeat their July dissents in favor of a hike at this meeting.

• At the press conference, we expect Warsh to repeat the hawkish form of not providing forward guidance that he presented at Jackson Hole. He may say that the inflation data do not tell him that underlying trends have meaningfully improved, without explicitly stating that a rate hike is coming soon.

• After skipping October, we expect the FOMC to hike at the next meeting in December.

• Our baseline forecast for 2027 is that the Fed remains on hold, in line with the most recent dot plot, but the risk is to the upside as we expect inflation to rise further in the coming months.

Introduction

The next meeting of the FOMC takes place on October 27-28. We expect the Committee to keep the target range for the federal funds rate unchanged at 3.75-4.00%. However, we do not expect this decision to be unanimous. We are likely to see a repeat of the dissents by Hammack, Kashkari and Logan at the July meeting, in favor of a hike. At the press conference, we expect Chair Warsh to stick to his principle of not giving forward guidance, but we also think that he will do this in a hawkish way. There will be no update of the economic projections in October, the next is in December.

On hold, with hawkish dissents

At the previous meeting in September, the FOMC unanimously raised the target range for the federal funds rate by 25 bps to 3.75-4.00%. The economic and rate projections provided by the Committee also showed a hawkish shift in the Fed’s reaction function. After hiking in September, skipping October has the benefit of observing more data before the next move. Hiking in December will get the federal funds rate where the median FOMC participant thinks it should be by year-end. Several Fed speakers have also recently indicated that they are not in a hurry. Skipping October also has the benefit of avoiding raising rates less than a week before the midterm elections. The party of the President usually loses seats in the midterms and a rate hike may not lead to a better election outcome. What’s more, President Trump has made clear he actually wants the Fed to lower rates. Of course, the FOMC will deny that the midterms played a role in their decision, as they should.

We expect the FOMC to remain on hold in October, but this is not likely to be a unanimous decision. We are likely to see Hammack, Kashkari and Logan repeat their July dissents in favor of a hike at this meeting. Note that there were four dots in the September dot plot indicating two additional hikes of 25 bps before the end of the year. Skipping October would make this impossible (with 50 bps in December a less likely move), so there are four FOMC participants who don’t want to remain on hold in October, given that recent inflation data have likely bolstered their view. We think that three of these are actually voters, the three dissenters from the July decision to be precise.

Another hawkish form of no forward guidance?

Regarding the next meeting in December, Kevin Warsh has been consistent in refusing to give forward guidance during post-meeting press conferences and other public appearances.

Therefore, we expect him to stick to this principle at the October press conference. However, he is likely to repeat the hawkish form of not providing forward guidance that he presented during his Jackson Hole speech. In his take on the economy, we expect him to repeat that underlying trends in inflation have not meaningfully improved, without explicitly saying that the next hike is coming soon.

We expect the next hike in December. There seems to be strong support for this in the Committee and we expect the inflation data to solidify this support. Given recent developments in oil prices, CPI inflation is likely to rise further, which should raise the probability of a December hike.

Conclusion

Looking further ahead, to 2027, the risks to our baseline scenario that the Fed remains on hold are to the upside. In the September dot plot, the median FOMC participant expected to remain on hold in 2027, after one more hike in 2026. In contrast, futures markets have priced in about three hikes from now. If inflation climbs further due to the recent rebound in oil prices, the median FOMC participant may start to consider an additional hike in 2027, instead of remaining on hold. Our baseline scenario is that after a long pause, the Fed will start cutting in 2028.

Based on our energy price forecasts, we expect CPI inflation to fall to 2.2% in the final quarter of 2027. This should open the door to the first rate cut in the first quarter 2028 (we have pencilled in March). Although outside the scope of the table below, we expect the second cut in March 2029 and the third cut in March 2030.

Based on the resilience that the economy has shown this year, we think that the terminal target range for the federal funds rate is 3.25-3.50%, which means that the FOMC will not cut as far as they now expect (until 3.2%).