Fed Policy Monitor: Hiking bias and curve reaction – NBC Economics and Strategy

NBC Economics and Strategy, authored by Taylor Schleich and Ethan Currie, reviews the latest Federal Reserve decision following strong CPI data. The Fed delivered a widely expected rate hike and signaled support for restrictive policy for a prolonged period. Their dot plot shows policy rates staying above 3.5%–3.75% until late 2029, flattening the curve as front-end yields rise while long-end yields hold steady.

Fed stance, dots and curve dynamics

"After last week’s CPI report, there was little doubt about this one. A hike today was widely expected but this doesn’t appear to be a meek or reluctant rate increase (even though the Fed held out for a long time before tightening). Based on an upwardly revised dot plot, there seems to be relatively broad support for more restrictive monetary policy for a significant period of time—the Fed doesn’t see a return to a 3.5% to 3.75% range until the end of 2029."

"This supported a significant flattening of the curve with front-end yields rising and long-end yields holding steady. Not surprisingly, Warsh was at pains to stress his commitment to delivering price stability. But unlike prior decisions, the bulk of the market move came before the Chair spoke, with this presser proving relatively uneventful."

"The market reaction is not surprising based on what was delivered/signalled. But the Fed will still need to follow through on this hiking bias for the longer-end to remain somewhat contained. We do believe that further tightening is in store, likely at the next decision in late October."

"From there however, the outlook becomes a bit more muddied. Despite Warsh’s outwardly hawkish stance, the Fed has demonstrated time and again that they’ll err on the side of accommodation. That doesn’t mean they’ll be easing early next year but if inflation begins to cool (as it’s widely expected to), we think it’ll be difficult to build a consensus around hiking a third (or fourth, or fifth, etc.) time."

"We see a 4.25% upper bound target representing the peak of what could be a brief tightening cycle. Eventual cuts may be dictated by the sustainability of the economic expansion (i.e., the AI boom). Relative to the very gradual easing path laid out in this dot plot, we think risks are skewed to earlier and more significant rate cuts."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)