Instant Reaction: The Fed Decides

SPEAKER_1 (0:02)

Bloomberg Audio Studios, podcasts, radio, news.

SPEAKER_2 (0:09)

This is a breaking news update from Bloomberg. Instant reaction and analysis from our 3,000 journalists and analysts around the world.

Tom Keene (0:19)

Down in Washington DC from the nation's capital is Mike McKee.

Mike McKee (0:23)

It is a rate increase, the first of a cycle, a unanimous decision to raise their benchmark rate, a quarter point to three and three quarters to four percent. Sixteen members of the committee anticipate another increase this year. Only two would hold here. Kevin Warsh, the chairman, does not submit a dot. Eight, almost half, see another increase, another rate increase next year, while six call for no change.

Four see rate cuts in 2027 One of them calls for rates to fall to three and a quarter percent. Almost as significant, they raise their long-run view, essentially the neutral rate to 3.2 percent from 3.1 percent in June. The members see faster growth this year and next, 2.3 and 2.4 percent, up a tenth each from their June forecasts. And the economic activity, the statement says, is expanding at a solid pace. Unemployment is forecast to remain at 4.1 percent this year and hold at that level through 2029

Job gains, the statement says, have kept pace with the workforce and the unemployment rate has changed little.

Inflation though, according to the statement, remains elevated. The median outlook is seen higher this year. PCE headlined at 3.7 percent, up from 3.6 percent in June. Next year, it falls to 2.3 percent. Achieving the 2 percent target gets pushed out as usual two years to 2029 now. Core PCE will be 3.4 percent at the end of 2026 Up a tenth next year, it's 2.5 percent unchanged. The statement concludes, today's policy action will support a timelier return to the committee's 2 percent goal. The committee will deliver price stability.

Tom Keene (2:12)

Mike McKee, thank you, sir. You stay close. Let's go through the price action. Bond's advancing into the decision. We give only just a little bit of that up. Yields are lower by two basis points at the front end. Two's at 464 On tens this afternoon, we're down by five to 495 Earlier in the week, of course, breaching 5 percent, a number, a level we hadn't seen going all the way back to 2007, at least earlier this week. In the equity market this afternoon, on the S&P 500, on the NASDAQ, on small caps, the Russell, we still advance. We're still just about positive, though we're off-session highs up by 0.2 percent on the S&P. The question for the chairman in this news conference, was this a one-off tweak? Is it high for longer or higher for longer? Is it the start of something more than just 25?

Lisa Abramowicz (2:53)

The word that I think is going to be analyzed and overanalyzed will be timelier, a timelier return to 2 percent inflation. The median forecast in the statement of economic projections, granted it did not include Fed Chair Kevin Warsh, includes an additional 25 basis point hike this year. And as Mike was saying, a longer term, higher long-term neutral rate. All of this speaks to the idea that this is part of a cycle, this is not a one-off and that this is a Fed that has run out of patience. The unanimous decision, Bob Michael nailed that, was a big tell given how many people got on board, including the Fed Chair himself.

SPEAKER_6 (3:27)

I'm absolutely fascinated by the labor call, which I know is off the radar right now, but they don't look for any change in the labor economy. It seems to me they're looking at output to be good and not problematic. This is all going to get solved gloriously by inflation coming down and output will be fine. Says who? And that's to me the huge mystery here.

Tom Keene (3:48)

Neil Dutta of RemMac, the first to respond in my inbox, reads as follows, the Fed is not done. The odds are they are underestimating just how much work they need to do. That also explains the gap between the policy rate even now this afternoon and where the two-year is currently, because the two-year is materially higher than the policy rate.

Lisa Abramowicz (4:05)

Ultimately, do they close the gap of 100 basis points? And what direction will that gap be? If the Fed is further behind the curve than they realize, then is the goal here, given the timelier return to 2% inflation, is the goal here to get there more quickly and to take out some of the dynamism that we have seen in, frankly, capital markets as well as just overall growth?