"A Harsher Message Than Expected": Wall Street Reacts to the Fed's Rate Hike

By raising interest rates, the U.S. Federal Reserve has effectively begun a new cycle of monetary tightening, noted Matthew Luzetti, Deutsche Bank’s chief U.S. economist, and Diane Swonk, KPMG’s chief economist, during an appearance on Bloomberg TV. On Wednesday, September 16, the Fed decided to tighten monetary policy for the first time since July 2023, with members of the Federal Open Market Committee acting unanimously. The overwhelming majority of committee members expect at least one more rate hike before the end of the year.

Wall Street is divided on how many rate hikes lie ahead. Here are the analysts' initial estimates.

— “[Warsh’s rhetoric] is a harsher signal than expected, especially given that the Fed has removed the rate cut from its forecast for next year,” Bloomberg quotes Omair Sharif, founder and president of Inflation Insights, as saying.

— “I think the 25-basis-point rate hike helped Fed Chair Kevin Warsh restore confidence in himself—this is evident from the narrowing of the spread between long-term and short-term bond yields,” — said Tracy Chen, portfolio manager at Brandywine Global Investment Management, in an interview with Bloomberg. — The markets for risky assets also reacted calmly and in an orderly manner.”

— “We believe this rate hike may turn out to be a one-off,” the agency quotes Christopher Hodge, chief U.S. economist at Natixis Corporate & Investment Banking, as saying. — “That would be unusual, but a rate hike against the backdrop of slowing inflation is also an unusual situation.”

— “The Fed has made it clear that, at this stage, it is not considering the possibility of an aggressive cycle of monetary tightening, — according to a note by Kay Hay, global head and chief investment officer for fixed income and liquidity solutions at Goldman Sachs Asset Management, as quoted by CNBC. — Based on the summary of economic forecasts, most FOMC members expect a total of two rate hikes this year. “There will likely be no further tightening at the October meeting due to the proximity to the midterm congressional elections.” The December rate hike will depend on upcoming inflation data and energy price trends, the strategist believes.

— “Warsh probably didn’t submit his own forecast for the consensus projection, but it doesn’t really matter whether he’s a hawk or a dove,” wrote Anna Wong, chief U.S. economist at Bloomberg Economics. — “Even if he wanted to leave the rate unchanged, most committee members would have voted against him. The forecast shows that most committee members view this decision as the start of a new, but moderate, cycle of rate hikes.”

— “By stating that raising rates would allow inflation to return to 2% ‘more quickly,’ the FOMC made it clear that the job isn’t done yet,” Bloomberg quotes Luigi Buttiglione, CEO of the consulting firm LB Macro. “It will likely take at least three more rate hikes.”

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