Fed Hikes Rates For First Time In 3 Years — Here’s Why It Matters

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Ed Elson (1:46)

Welcome to Prof G Markets. I'm Ed Elson. It is September 17th. Let's check in on yesterday's market vitals. The major indices fell following the Federal Reserve's interest rate decision. More on that in a second. Treasury yields rose, the dollar strengthened and finally bank stocks had their worst day since February on concerns that higher rates will slow lending growth.

Okay, what else is happening? The Fed just raised rates for the first time since 2023 In a unanimous vote, officials raised rates by a quarter point and the Fed's forecast shows an additional hike is likely this year. The hike is an attempt to cool inflation, which has been above the Fed's target for five and a half years. And in his remarks, Warsh said that, quote, this summer's inflation readings do not tell me that underlying trends have meaningfully improved. Investors largely had expected this outcome on Cauchy. The odds of a rate hike rose to 88% ahead of the decision. Following the decision, the yield on 10-year treasuries hit a 52-week high. The 10-year climbed back above 5% and stocks fell.

Joining us to discuss the Fed's decision and what to make of it, we are joined by Robert Armstrong, author of the Unhedged Newsletter and US Financial Commentator for the Financial Times. Rob, it's great to see you. We have finally gotten a rate hike, a quarter point hike, a unanimous decision.

Lots we could say, but I'll start with your initial reactions to the news.

Robert Armstrong (3:18)

We can put to bed the theory that Kevin Warsh is Donald Trump's sock puppet.

I had never bought that theory, particularly for the simple reason that I don't see what's in it for Warsh playing the part of the sock puppet. He had nothing to gain by doing that. He's in a good position to go his own way. So that I think that was becoming clearer as the weeks went on. But now it's very clear he has hiked despite the threats and protestations of the president. So that is point number one. Point number two, and you mentioned this, which I think is very interesting and very important for the psych, is the unanimity. It was not at all obvious going on that this was going, that all the voting members were going to agree on this outcome. Several members of the committee had made slightly dovish noises going in.

So this is a very good sign for the Fed chair's credibility, or might be. There's two ways this may have happened. Either he wanted to hike and he got everybody on board, or almost everybody was on board and he wasn't, and he joined the crowd, so he didn't look like a weenie, right?

But there is a little interesting detail you might have noticed about this. In the notorious dot plot, which is this graphic they include, which shows for this year and several coming years, what each member of the committee believes is the appropriate monetary policy. There were two dots that showed that the appropriate monetary policy for the end of this year is the rate we were at before the rate hike. So what are those two people thinking? We agree, we vote with you to raise the rate today, but we think we're going to cut by the end of the year? So that was like this weird like, what are we doing? Maybe that's a good argument to go with Warsh and dismiss the DOS plot altogether, get rid of the thing. But the important point was the committee as a whole agreed. That puts them in a strong position politically, sends a strong message, very important.