The Fed hikes rates. What happens now?

PodcastMaking SenseMichael FeroliSep 17

The guest sees the Fed’s rate increase as a demonstration of independence, while noting that future independence may depend on the courts. He discusses mixed signals on inflation and the neutral rate, and says a pause before another hike is possible if incoming data are weak. A unanimous vote may reinforce the Fed’s inflation credibility, while further hikes could depend on labor-market conditions.

Interest Rates Monetary Policy Inflation

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Key Takeaways

The guest says the Fed likely gave more weight to sustained year-over-year core PCE inflation above 3% than to the improved three-month trend, while FOMC participants differ on which measure to emphasize. He adds that tighter labor-market conditions could warrant more than one rate hike, though he frames this as a hint to monitor rather than a firm prediction.

The guest describes mixed signals on the policy stance: the median longer-run dot rose to 3.25% and the funds rate was just below 4%, even as Chair Walsh said rates were not above neutral; the guest says most participants would likely call policy modestly restrictive. With only one employment report and one inflation report due before the late-October meeting, he says the Fed could pause before hiking again, particularly if incoming data are weak.

The guest views the Fed’s rate increase despite calls for lower rates as a positive demonstration of independence, while cautioning that future independence may depend on what happens with the courts. He also argues that the unanimous committee vote signals resolve on inflation and may help preserve the Fed’s credibility.

GEO-POLITICS

Fed Independence — The guest views the Fed’s rate increase, despite calls for lower rates, as a positive demonstration of independence. But future independence may depend on what happens with the courts.

“Yeah. I think it's a good, you know, step towards showing independence…”—

ECONOMY

Inflation Trends — The guest says sustained year-over-year core PCE above 3% probably mattered more to the Fed than the improving three-month trend. FOMC participants differ on which inflation trend to emphasize.

“There's some debate as to whether you wanna look at three month annualized trends, year ago trends. I think each participant on the FOMC has a different view of that…”—

Neutral Rate — The guest highlights mixed Fed messaging: the median longer-run dot rose to 3.25%, while the funds rate was just below 4%. Yet Chair Walsh said policy rates were not above neutral. The guest says most committee participants would likely describe policy as modestly restrictive.

“So in the dot plot, the longer run dot is commonly interpreted as the neutral rate…”—

Pause Possibility — The guest says the Fed could pause before hiking again, with only one employment report and one inflation report due before the late-October meeting. He cites quarterly moves in 2017 and 2018 as precedent. Weak incoming data would make a pause easier to justify.

“So the next meeting is in late October. You really only get one set of data reports between now and then…”—

Fed Hike And Inflation

Faroli says the expected, unanimous hike followed firm year-over-year core PCE inflation, while policymakers must weigh mixed trend measures and limited data before the next meeting.

Neutral Rate And Pause

Faroli describes mixed signals about whether policy is restrictive and says the Fed could pause before another hike, especially if incoming employment and inflation data are weak.

Fed Credibility And Independence

Faroli says the short press conference offered little new information, while the unanimous vote may strengthen inflation credibility and the rate increase demonstrated a step toward Fed independence.

Labor Market And Next Hikes

Faroli expects core PCE to remain central but says labor-market tightening could become more important and potentially lead to more than one additional rate hike.