Fed will hike once more in December before slowing growth and falling energy ease inflation – Natixis

Economists Christopher Hodge and Selin Aker wrote in the wake of the Fed’s rate decision on Wednesday that  one of the dissenters in the FOMC’s 10-2 vote to hold was Lisa Cook, who registered her first dissent since taking office in 2022.

“Surprisingly two erstwhile hawks, Dallas Fed President Lorie Logan and Minneapolis Fed President Neel Kashkari, who both dissented when the Fed held rates steady in July, did not again dissent in favor of a hike,” they said. “The pause in this meeting follows through on the implicit suggestion from NY Fed President Williams and Vice Chair Jefferson that consecutive hikes are not urgent at this time. Still, inflation remains a problem, growth remains solid, and the unemployment rate is stable – and a hike in December is now likely a foregone conclusion, absent a truly significant shift in the data.”

Parsing the official statement, the economists noted that the Fed “upgraded its assessment of growth from solid to strong,” while adding that “the accumulation of more information will help the Committee determine the policy stance appropriate to ensure a timely return of inflation.”

“This suggests that today’s pause will give the FOMC time to see if the recent higher-than-expected inflation print in September was a one-time increase or the start of a new upward trend,” they said.

Turning to Warsh’s press conference, Hodge and Aker said the Fed Chair “touted stronger trend growth, record capex, and low unemployment,” while reaffirming their “responsibility to get inflation down,” adding that while financial conditions had tightened somewhat, they remained loose on balance.

“The highlight of his prepared remarks was the planned changes to the FOMC meeting schedule,” they said. “The FOMC will continue to hold eight meetings per year, and Chair Warsh wants to keep it that way. However, in 2027, one of the eight meetings will focus exclusively on monetary policy strategy, with no vote or statement. Similarly, in 2028, two meetings will be dedicated to strategy, while six will focus on setting policy.”

During the Q&A, Warsh failed to provide a definitive answer on why the Fed didn’t raise rates at this meeting. “He was also skeptical of the view that AI spending is insensitive to interest rates,” they said. “He noted that market participants were becoming more selective about AI-related credit, with some spreads widening, but added that capex strength had extended beyond AI over the past few quarters.”

Looking ahead, Natixis expects the Fed to remain focused on inflation in the near term, but the economists see slower growth in an environment of lower energy prices and waning tariff effects to reduce price pressures, and they see one additional rate hike in December before the current cycle ends. “[B]ut that call is contingent on encouraging inflation data in the coming months and additional concerns about the growth outlook.”

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