Hawkish Fed hold; here’s 5 things you need to know

Executive Summary

As expected, Federal Reserve (Fed) policymakers held rates steady within a range of 3.75% – 4.00% in a 10-2 vote. The two dissents preferred another 0.25% rate hike today and reinforce our view that the Fed remains on course for a 0.25% rate hike in December.

During the post-meeting press conference, Chairman Kevin Warsh spent much of his prepared remarks addressing inflation. He specifically called out inflation running above the Fed’s target for roughly six years, stating plainly, “inflation is too high.”

After touching session highs, U.S. stocks pared gains to roughly where they started the trading day. The U.S. Treasury curve steepened with 0- to 3-year yields declining while yields further out the curve rose 0.01% to 0.06%. The 2-year U.S. Treasury yield fell to roughly 4.72%; the 10-year yield increased to 5.05%. 

5 key takeaways

1.  The Fed chose to hold today, but preserved its hawkish tilt

The committee stayed patient despite hotter inflation readings recently, while the labor market remains stable. Perhaps in some respects, higher rates are doing some of the Fed’s work, meaning modestly tightening financial conditions. Regardless, this aligns with Chairman Warsh’s emphasis on persistent above-target inflation over roughly the past six years and his characterization that the economy is strong, although not overheating. This is why we view today’s hold as being hawkish.

2.  The Fed is likely to hike again in December

The Fed has historically moved in a series rather than stopping after one hike. However, inflation is currently being driven by the crude oil supply shock. Thus, a decline in oil prices could quickly ease inflation, as seen in June and July. We expect a rate hike in December and a data-dependent approach in 2027 based on the progress on inflation, penciling in two hikes next year.

3.  There will only be seven “live” policy meetings in 2027

Starting next year, the Federal Open Market Committee will maintain its eight-meeting schedule, but one meeting will be dedicated to broader monetary policy strategy rather than a policy vote or statement. In 2028, two meetings will be strategy-only meetings. This shift will likely add to interest rate volatility on the margin, particularly around future Fed meetings and key economic data releases.

4.  Warsh remains tight-lipped on policy

Chairman Warsh continues to keep his messaging measured, offering brief answers with limited detail and virtually no forward guidance. He deftly side-stepped political questions and other speculative questions. As Chairman Warsh repeatedly said, the Fed is “staying in our lane” and setting policy based on economic conditions.

5.  U.S. bond yields still flirting with multi-decade highs

With the 10-year Treasury yield having recently found support near 5%, we continue to view the current rate environment as an attractive entry point for long-term fixed income investors given the strong relationship between starting yields and forward-looking fixed income returns. More than 80% of core fixed income’s long-term total returns are derived from the income delivered by bonds as opposed to changes in interest rates.  

Bottom line

The Fed held rates steady but maintained a hawkish bias, with two members favoring a hike and Chairman Warsh emphasizing that inflation remains too high. We expect a 0.25% rate hike in December. Beyond that, the path continues to depend on inflation. Because the oil supply shock is partly driving higher inflation, a decline in crude oil prices could ease pressures quickly and limit how much the Fed needs to hike. With Chairman Warsh offering little forward guidance and a reduction in policy setting meetings going into 2027, we expect interest rate volatility around incoming data and the Fed meetings to remain elevated.