MNI FED WATCH: Fed Leans Toward Another Rate Hike This Year

Federal Reserve officials look inclined to raise interest rates once more this year and potentially another time early next year, according to new dot plot projections that suggest Wednesday's interest rate hike was the start of a limited tightening cycle. 

Fed Chairman Kevin Warsh declined to discuss whether the increase in the federal funds rate to 3.75%-4% was the first of a series of moves, in keeping with his desire to offer less guidance. But he said underlying inflation is too high and the geopolitical situation has changed, hinting conditions are not yet tight enough to bring inflation back to target in a timely manner.

The SEP clearly showed policymakers hawkishly leaning into a higher for longer posture, with the median showing one more hike for 2026 and eight officials penciling in another rise in 2027. For a second time in a row, Warsh did not submit dots for the SEP. 

"The plain fact is that inflation is too high and has been for too long,” Warsh said during the news conference. "Inflation risks are to the upside, while labor risks are roughly balanced."

He said the FOMC's standard of having confidence that underlying inflation is moving back to target in timely manner has not been met, adding too many categories in the inflation basket are still rising above 3%.

"We removed a dose of accommodation so that financial and credit conditions would be more consistent with our ultimate objectives," he said.  

Equities sank and Treasury yields jumped after the central bank meeting. Futures see a 50% chance the Fed increases rates at its next meeting in October. (See: MNI INTERVIEW: Fed Rates Likely To Peak 75BP Higher-Lewis)

HIGHER FOR LONGER

Warsh demurred from any questions related to President Donald Trump, who has made clear his desire for lower rates. Just days before the meeting, Trump threatened to cut off broad swathes of trade if the Fed did not cut rates. Trump demanded lower interest rates to 1% after the FOMC meeting.

The Fed Chairman said three factors influenced the FOMC's decision to raise interest rates on Wednesday. One, wide-ranging data suggesting a strong economy. Second, summer inflation trends that "weren't passing the test." Lastly, the FOMC assessment that the geopolitical situation has changed. 

"All three of those things helped themselves to a firm, unanimous decision today," Warsh said. (See: MNI INTERVIEW: Fed Rates Likely To Peak 75 BP Higher - Lewis) 

The median FOMC official saw rates coming down in 2028 to 3.9% and in 2029 to 3.6%. Inflation isn't expected to reach the central bank's 2% target until 2029. 

"Today's action starts to show we are serious about this. And we will deliver on the price stability objective, and as the statement said, we will do it on a timelier basis," he said. 

Long-end Treasury yields have risen recently for three reasons including economic strength, competition for capital, and geopolitics, Warsh said, in a shorter press conference lasting less than 30 minutes. 

RPT-MNI INTERVIEW: Overblown Rate Path Tricky For BOE - Aikman

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Members of the Bank of England’s Monetary Policy Committee are likely to regard the markets rate path projecting slightly less than 100 basis points of hikes by the middle of next year as overblown, but its effect in tightening financial conditions is also useful, complicating officials’ communications challenge, National Institute of Economic and Social Research head David Aikman told MNI.

Most members probably judge that domestic inflationary forces continue to be subdued, with weakness in the labour market, a situation which does not call for steep tightening, Aikman, also a former senior BOE official, said in an interview ahead of Thursday’s rate decision, at which the BOE is widely expected to see Bank Rate left at 3.75%.

While officials may not necessarily address market pricing this week, they would be wary of rapidly deflating rates expectations which are exercising a disinflationary effect at a time when energy prices have been pushed higher by the conflict in the Middle East, he noted.

"There's a degree to which this is quite convenient for the MPC because ... they've effectively tightened policy really quite a lot relative to the outlook back in February (when the Iran war started)," he said. (See MNI INTERVIEW: More Difficult For BOE To Look Through-Sentance)

At that point Bank Rate was expected to come down, but the curve has since steepened by around 200 basis points, Aikman noted.

“They've done a lot of tightening without really doing anything," he said.

Aikman stressed however that that fear of further reinforcing tightening expectations would be unlikely in itself to prevent the MPC from delivering a surprise hike in September should it see fit to do so. (See MNI: BOE Needs Simple Line As Market Diverges - Forbes)

"There's still language they can use explaining the decision" and suggest whether they are comfortable with the curve so "I don't think it is a constraint on their ability to act this time," Aikman said.

Rates markets are pricing in a hike at the BOE's November meeting. NIESR's summer forecast anticipated that the BOE would remain on hold in 2026, and their next forecast update is due in the autumn.

PUZZLING DIFFERENCE

While the rate path shows Bank Rate heading up fairly swiftly from its current 3.75% towards 5% analysts have very largely assumed a lower path. Aikman does not buy the argument that the differences are purely technical.

"I don't think term premium could explain a gap of that size at that horizon. I think it is an actual puzzle as to exactly what's going on here, and whether it is just a difference of view between the way economists are reading the runes and trying to understand the likely reaction of MPC members, and actually where market participants think ultimately the forces will take the MPC," he said.

"Do they actually think they're going to raise rates all the way up to five to contain a shock that isn't being amplified, at least so far .. through second-round effects, wage setting, and so on?" he said.

"I think that's … a difficult judgement for them. It's a levels question about … what's the point where this tightening gets excessive," he said, adding that they probably think the level has "gone a little bit too far."

Aikman is clear that is up to individual MPC members to take a view on the appropriateness of the curve and that it is not a technical judgement for Bank staff.

As an MPC member "you should have a view on whether the curve .. is providing the right degree of support or tightening required to meet the target you've been given," he said.

MNI INTERVIEW: Overblown Rate Path Tricky For BOE - Aikman

Members of the Bank of England’s Monetary Policy Committee are likely to regard the markets rate path projecting slightly less than 100 basis points of hikes by the middle of next year as overblown, but its effect in tightening financial conditions is also useful, complicating officials’ communications challenge, National Institute of Economic and Social Research head David Aikman told MNI.

Most members probably judge that domestic inflationary forces continue to be subdued, with weakness in the labour market, a situation which does not call for steep tightening, Aikman, also a former senior BOE official, said in an interview ahead of Thursday’s rate decision, at which the BOE is widely expected to see Bank Rate left at 3.75%.

While officials may not necessarily address market pricing this week, they would be wary of rapidly deflating rates expectations which are exercising a disinflationary effect at a time when energy prices have been pushed higher by the conflict in the Middle East, he noted.

"There's a degree to which this is quite convenient for the MPC because ... they've effectively tightened policy really quite a lot relative to the outlook back in February (when the Iran war started)," he said. (See MNI INTERVIEW: More Difficult For BOE To Look Through-Sentance)

At that point Bank Rate was expected to come down, but the curve has since steepened by around 200 basis points, Aikman noted.

“They've done a lot of tightening without really doing anything," he said.

Aikman stressed however that that fear of further reinforcing tightening expectations would be unlikely in itself to prevent the MPC from delivering a surprise hike in September should it see fit to do so. (See MNI: BOE Needs Simple Line As Market Diverges - Forbes)

"There's still language they can use explaining the decision" and suggest whether they are comfortable with the curve so "I don't think it is a constraint on their ability to act this time," Aikman said.

Rates markets are pricing in a hike at the BOE's November meeting. NIESR's summer forecast anticipated that the BOE would remain on hold in 2026, and their next forecast update is due in the autumn.

PUZZLING DIFFERENCE

While the rate path shows Bank Rate heading up fairly swiftly from its current 3.75% towards 5% analysts have very largely assumed a lower path. Aikman does not buy the argument that the differences are purely technical.

"I don't think term premium could explain a gap of that size at that horizon. I think it is an actual puzzle as to exactly what's going on here, and whether it is just a difference of view between the way economists are reading the runes and trying to understand the likely reaction of MPC members, and actually where market participants think ultimately the forces will take the MPC," he said.

"Do they actually think they're going to raise rates all the way up to five to contain a shock that isn't being amplified, at least so far .. through second-round effects, wage setting, and so on?" he said.

"I think that's … a difficult judgement for them. It's a levels question about … what's the point where this tightening gets excessive," he said, adding that they probably think the level has "gone a little bit too far."

Aikman is clear that is up to individual MPC members to take a view on the appropriateness of the curve and that it is not a technical judgement for Bank staff.

As an MPC member "you should have a view on whether the curve .. is providing the right degree of support or tightening required to meet the target you've been given," he said.

MNI BOE WATCH: Markets Rates Pricing A Comms Challenge For BOE

The Bank of England is expected to hold rates again on Sept 17, likely in a repeat of July’s six-three vote, and to cut the pace of quantitative tightening.

Market pricing for a hike this week has come off, with only two basis points priced in after implying up to a 30% chance of a hike earlier this week as the conflict in the Middle East intensified. Investors will focus on any hints as to the BOE’s future moves, with over 100 basis points of increases priced in by July, including a hike at the next meeting in November. This pricing contrasts with far less aggressive comments by Monetary Policy Committee members, posing a challenge for the Bank’s communications strategy on Thursday.

Last week Deputy Governor Ramsden told the Treasury select committee that "the market curve is significantly above where it was expected to be before the conflict," while MPC member Alan Taylor reiterated that he viewed the Bank's hold since December as an "active decision to maintain the restrictiveness." 

Markets rates pricing picked up after the March meeting, when the Bank’s language was taken hawkishly. (See MNI: BOE Needs Simple Line As Market Diverges - Forbes)

Chief Economist Huw Pill, Megan Greene, and Catherine Mann voted for a hike in July, and are likely to do the same this week. (See MNI INTERVIEW: More Difficult For BOE To Look Through-Sentance)

Some members who have voted for a hold so far, including Governor Andrew Bailey and Deputy Governor Clare Lombardelli, have said they are watching for evidence of second-round effects before considering a hike. 

But, though recent GDP data has been above expectations, there is little clear evidence of additional wage pressures feeding through from higher energy costs. Ramsden told the TSC that "our preferred measure, private sector regular wages, came in at 2.8%," compared to 3.2% expected before the conflict, as vacancies have fallen. (see MNI INTERVIEW: BOE Needs To Hike In July - NIESR's Millard)

QUANTITATIVE TIGHTENING

The MPC will also vote to on the pace of further quantitative tightening, as gilt yields reached multi-decade highs after last week's news from the Middle East.

The July Monetary Policy Report included a box revising the estimate of the impact of QT since 2022 10-year yields to 20-30bps, while emphasising that the Bank's active sales have had "little impact on market functioning." (See MNI INTERVIEW: BOE Very Near Stable Reserve Level - Fisher)

Still, as the Bank approaches its equilibrium level of reserves, it is expected to slow the pace of QT to GBP50 billion per year, and reports in the Telegraph suggest it will cease its active sales of long-dated gilts. (See MNI INTERVIEW: BOE MPC Shouldn't Lead QT - ex-MPC's Saunders)

The Bank's next decision will come alongside an MPR on Nov 5, after the Oct 28 budget.

MNI BOE WATCH: Markets Rates Pricing A Comms Challenge For BOE

The Bank of England is expected to hold rates again on Sept 17, likely in a repeat of July’s six-three vote, and to cut the pace of quantitative tightening.

Market pricing for a hike this week has come off, with only two basis points priced in after implying up to a 30% chance of a hike earlier this week as the conflict in the Middle East intensified. Investors will focus on any hints as to the BOE’s future moves, with over 100 basis points of increases priced in by July, including a hike at the next meeting in November. This pricing contrasts with far less aggressive comments by Monetary Policy Committee members, posing a challenge for the Bank’s communications strategy on Thursday.

Last week Deputy Governor Ramsden told the Treasury select committee that "the market curve is significantly above where it was expected to be before the conflict," while MPC member Alan Taylor reiterated that he viewed the Bank's hold since December as an "active decision to maintain the restrictiveness." 

Markets rates pricing picked up after the March meeting, when the Bank’s language was taken hawkishly. (See MNI: BOE Needs Simple Line As Market Diverges - Forbes)

Chief Economist Huw Pill, Megan Greene, and Catherine Mann voted for a hike in July, and are likely to do the same this week. (See MNI INTERVIEW: More Difficult For BOE To Look Through-Sentance)

Some members who have voted for a hold so far, including Governor Andrew Bailey and Deputy Governor Clare Lombardelli, have said they are watching for evidence of second-round effects before considering a hike. 

But, though recent GDP data has been above expectations, there is little clear evidence of additional wage pressures feeding through from higher energy costs. Ramsden told the TSC that "our preferred measure, private sector regular wages, came in at 2.8%," compared to 3.2% expected before the conflict, as vacancies have fallen. (see MNI INTERVIEW: BOE Needs To Hike In July - NIESR's Millard)

QUANTITATIVE TIGHTENING

The MPC will also vote to on the pace of further quantitative tightening, as gilt yields reached multi-decade highs after last week's news from the Middle East.

The July Monetary Policy Report included a box revising the estimate of the impact of QT since 2022 10-year yields to 20-30bps, while emphasising that the Bank's active sales have had "little impact on market functioning." (See MNI INTERVIEW: BOE Very Near Stable Reserve Level - Fisher)

Still, as the Bank approaches its equilibrium level of reserves, it is expected to slow the pace of QT to GBP50 billion per year, and reports in the Telegraph suggest it will cease its active sales of long-dated gilts. (See MNI INTERVIEW: BOE MPC Shouldn't Lead QT - ex-MPC's Saunders)

The Bank's next decision will come alongside an MPR on Nov 5, after the Oct 28 budget.

MNI INTERVIEW: More Difficult For BOE To Look Through-Sentance

The Bank of England is likely to leave rates on hold in September, but underlying inflation dynamics are making it more difficult for policymakers to look through pressures from higher energy prices, former BOE Monetary Policy Committee member Andrew Sentance told MNI.

"There's a lot else that's been going on on the inflation front, apart from higher energy prices, which the monetary authorities, in particular the Bank of England, should have been much more on the ball to deal with," Sentance said in an interview. 

"I don't think they should be looking through it, certainly now. After all, we've had five years of pretty high inflation, averaging about 5%. Whether you look at it, including energy or excluding energy, those numbers are way above the target when the mandate is to achieve the inflation target at 2% at all times.”

NO HIKE

However, Sentance, who served on the MPC at the height of the financial crisis, does not foresee a hike in September. He expects a similar voting pattern to that seen in July, with BOE Chief Economist Huw Pill, Megan Greene and Catherine Mann again voting to increase rates.

"I think it's quite good that those three, particularly Hugh Pill, have been defending their position. I think he's been quite outspoken, really, which given his position as chief economist of the bank, I think that's a good thing," he added. (See MNI: BOE Needs Simple Line As Market Diverges - Forbes)

"But just talking about second-round effects is slightly missing the mark," Sentance said. 

"Nominal domestic demand is still running somewhere close to 5% and, because GDP is only growing by about 1% year on year,  the GDP deflator is running somewhere close to 4%.

PUBLIC SECTOR SPENDING

"These are figures that should give monetary authorities grounds for concern about the general demand picture, showing that nominal demand is too strong. Public sector borrowing and public sector spending is another factor which is contributing to that and is pumping extra demand into the economy," he added. 

"We're not just dealing with an oil price shock. We're dealing with demand that is running ahead of where it ought to be. If we're going to achieve 2% inflation quite significantly ahead, probably those demand figures should be closer to 3%, not nearly 5% and the GDP deflator should be closer to 2%.

Sentance said policymakers are "waiting for a second-round effect, so to speak." 

However, "we've already got the (nominal) GDP rate running at three and a half percent, which is nearly double the 2% figure, which is pointing to more generalized inflation pressures in the economy.”

MARKET PRICING

Still, Sentence said current market pricing for rate hikes was difficult to understand given the known characteristics of the current MPC. (See MNI INTERVIEW: BOE Central Scenario Should Stress Uncertainty) 

"When I saw the market was pricing in four hikes, I just wondered where that's coming from," Sentance said. 

"That would not seem to be backed up by the behaviour of the MPC in recent years. If you look at the current composition of the MPC and the way they've reacted to inflation shocks, I could see them making perhaps a couple of interest rate increases, but I'm a bit surprised," he said.

"Mervyn King spoke about the Maradona Theory of monetary policy; feint in either direction as needed, but continue in a straight line," Sentance said.

"But as far as the MPC is concerned now, the question is: are they going straight at the right level?" 

MNI BOJ WATCH: Board Set To Raise Rate; Future Pace In Focus

The Bank of Japan board is likely to raise the policy interest rate 25 basis points to 1.25% following its two day meeting that concludes on Friday as the economy moves in line with its baseline scenario and inflationary pressures persist. 

The BOJ is expected to note financial conditions remain accommodative following the hike, signalling further increases ahead. While Governor Kazuo Ueda will highlight the Bank’s desire to focus on upside price risk, he is unlikely to clarify the terminal rate or comment on the expected hiking pace, noting the Board’s strategy will depend on the evolution of the economy and prices.

Market’s have fully priced in a hike on Friday, which would represent the Board’s third 25bp increase this year, and see the policy rate at 1.8% by June, its highest level since 1993. (See MNI BOJ WATCH: Ueda Points To Possible September Hike)

FLEXIBLE STANCE

The Bank is likely to move away from its previous approach of a hike every six months in favour of a flexible stance that moves the policy rate as needed based on the economy and prices. (See MNI POLICY: BOJ Sees Scope For Flexible Rate Hikes) Past hikes to 1% have had little impact on the economy and inflation to date, giving the Bank scope to act. 

However, with the policy rate entering the lower bound of the Bank’s estimated neutral interest rate range of 1.1-2.5%, some board members are likely to support a cautious approach in line with Ueda’s strategy that has emphasised risk management. 

Focus will also shift to the Board’s vote. Prime Minister Sanae Takaichi has installed two dovish board members, Toichiro Asada and Ayano Sato, who could vote against a hike. Markets would likely interpret that to mean Takaichi remains against tighter policy, despite U.S. pressure, which will lead to renewed yen weakness against the greenback. 

The three internal Board members, including Ueda, see the need for a more neutral rate and financial conditions to prevent underlying inflation rising above the 2% target, while external members Takata Hajime and Masu Kazuyuki have also called for swifter normalisation.

COMPLICATED COMMUNICATIONS

Ueda’s post-decision communications will walk a balanced line to avoid stoking volatility in the yen and JGB markets. Overly hawkish language would put premature upward pressure on the terminal rate, while a dovish interpretation would lead to a yen and bond selloff – both highly undesirable outcomes. 

Ueda’s comments are likely to focus on the outlook for the economy and prices framed within his risk-management approach. The BOJ will not relax its guard against inflation and it will seek opportunities to raise the policy rate unless corporate inflation views three to five years ahead peak and stabilise amid less accommodative or neutral financial conditions.

Bank officials are still concerned about the three factors highlighted in July that could still support prices, including AI-driven demand, oil prices and the yen. While corporate expectations have not accelerated, they are drifting higher, while the BOJ's composite index of inflation expectation results have also shown trend inflation and households’ expectations rising toward 2%, fuelling its concerns.