The overall reaction to the FOMC rate decision and press conference was hawkish. The Fed hiked rates by 25 basis points as expected in a unanimous decision, while the median projection saw another hike by year-end before rates remain on hold throughout 2027. The statement reiterated the Fed’s commitment to price stability, a message echoed by Chair Warsh in the press conference against the backdrop of a labour market at or near full employment and strong economic growth. Indices largely finished lower, although the NASDAQ 100 was little changed, while the Dow lagged and the RSP fell 0.8%. Sectors were predominantly lower, with Energy, Financials and Materials lagging, while Tech, Health Care and Utilities outperformed, albeit with minimal gains. Energy stocks tracked crude prices lower, with the complex pressured by more constructive geopolitical commentary. Iranian Foreign Minister Araghchi said the MoU with the US remains in effect and that Iran wants a return to a peaceful solution, adding, “We are not interested in continuing the conflict, and we look forward to returning to a diplomatic solution.” Meanwhile, reports suggested US officials met with the Yemeni Houthis in Oman over the weekend, adding further pressure to crude a Houthis were committed to the 2025 ceasefire, and would not attack US and Israeli ships in the Bab al-Mandab. Elsewhere, source reports suggested half of Saudi Arabia’s key East-West oil pipeline will resume operations within days. The Treasury curve flattened following the FOMC rate decision, updated SEP and Warsh’s press conference, with the 10-year yield reclaiming 5.00% while the 2-year rose to around 4.74%, remaining at levels not seen since 2007. The hawkish Fed supported the Dollar at the expense of its G10 peers, with EUR/USD falling below 1.15 and USD/JPY rising above 156.00. Gold and Silver were also sold, while Bitcoin saw marginal gains, although the strength follows the notable weakness on Tuesday after the Senate failed to pass the CLARITY Act. Elsewhere, US Retail Sales were stronger than expected, while Import and Export prices were above expectations. UK CPI and Services inflation were in line with expectations, doing little to shift the dial ahead of the Bank of England rate decision on Thursday. Friday also sees the Bank of Japan rate decision, where the bank is expected to hike by 25 basis points. The Fed hiked rates by 25bps as expected, taking the target range for the federal funds rate to 3.75-4.00%, with the decision unanimous. The Statement saw only minor changes, with the Fed saying the rate hike would help return inflation to target in a more timely manner, while reiterating its commitment to price stability. The Fed maintained that inflation remains elevated, although it dropped the previous language attributing this in part to supply shocks. On activity, the Fed maintained that the economy is expanding at a solid pace, while adding that domestic spending has remained resilient despite uncertainty stemming in part from geopolitical developments. It maintained that productivity growth is strong, while describing capital investment as “robust”, versus “strong” previously. Labour market language was broadly unchanged, with the Fed reiterating that job gains have kept pace with growth in the workforce and the unemployment rate has changed little. Regarding the dot plot, Warsh did not submit forecasts again, with 18 participants submitting projections. The dots were hawkish, with the median seeing another 25bp hike in 2026. Twelve participants pencilled in one further hike this year, four saw two additional hikes, while just two saw no further hikes. The median remains at 4.125% through end-2027, implying one further hike this year followed by rates remaining on hold throughout 2027, before easing to 3.875% in 2028 and 3.625% in 2029. The longer-run rate was lifted to 3.2% from 3.1%. Growth forecasts were raised by 0.1ppts in both 2026 and 2027, while 2028 and the longer-run projections were maintained. Unemployment projections were lowered to 4.1% across 2026-28, while the longer-run rate was maintained at 4.2%. Both headline and core PCE inflation projections were raised for 2026 and 2028, while the 2027 projections were maintained. The overall message from the press conference was a familiar one from Warsh, with price stability remaining the primary focus against the backdrop of a strong economy and a labour market at or near full employment. Warsh said he does not believe the Fed will need to damage the labour market to achieve its inflation objective, reiterating that ensuring price stability is necessary to support durable economic growth. Warsh continued to avoid forward guidance, reiterating that the Fed is “committed to a discipline, not a decision.” With the labour market more or less at full employment and the economy strong, he said the Fed’s primary focus is on price stability. Warsh repeatedly pointed to Wednesday’s action as evidence that policymakers are serious about returning inflation to target. He also reiterated he does not focus on one particular data point, as he looks at the trends. Asked whether policy is restrictive, Warsh reiterated that he finds it difficult to characterise financial conditions as restrictive, although he acknowledged that the Fed had removed some accommodation with Wednesday’s rate hike. When asked whether markets had led the Fed into hiking rates, Warsh stressed that the move was “our decision.” He also acknowledged that the Fed cannot control individual prices, such as energy, but said it is the central bank’s responsibility to prevent second- or third-round effects from developing. Warsh also acknowledged the recent rise in bond yields, attributing it to three broad factors: the strength of the US economy, increased demand for capital amid robust CapEx, and geopolitical developments. Overall, the press conference carried a hawkish tone, with Warsh continuing to emphasise the price-stability side of the Fed’s mandate while speaking positively about the strength of the US economy and labour market. Notably, he did not characterise Wednesday’s hike as a risk-management move, nor did he repeat language from the previous press conference suggesting that tighter financial conditions were doing some of the Fed’s work. Instead, Warsh repeatedly framed the hike as evidence of the Fed’s determination to return inflation to target. Elsewhere both Oil and Gold closed lower by 3.5% and 1% respectively.
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