The Fed hikes rates. What happens now?

Samantha Azzarello (0:04)

Welcome to JPMorgan's Making Sense. My name is Samantha Azzarello, and I lead content strategy within global research for JPMorgan. Today, I'm joined by our chief US economist, Michael Feroli, to get his take on September's FOMC meeting and decision. Thanks for joining us, Mike.

SPEAKER_2 (0:20)

Thanks, Sam.

Samantha Azzarello (0:21)

So just in time for American football season, the Fed has called for a hike, 25 basis points to be exact. What do you think of the decision? And I guess, how would you read it in light of FOMC Chair Warsh's recent messaging that the Central Bank has, quote, work to do?

Michael Feroli (0:36)

Yeah. So in big picture, the decision came in pretty much as we and many others expected. It was unanimous and the dots point to one more hike likely this year.

So how does this fit in with his, particularly his Jackson Hole speech? Well, I think a lot of people read that as hawkish as some would say even painting himself into a corner in terms of if inflation between Jackson Hole and this meeting came in firm, then they would need to hike. So I think his speech at Jackson Hole, along I should say with several other Fed speakers, really teed this up and given the inflation developments between then and now, that's exactly what happened.

Samantha Azzarello (1:19)

So there's a cornucopia of inflation data.

Core PCE, the trend, it's been above 3% every month this year, but the three-month annualized pace has improved. We also had August CPI and PPI data. How do you think the Fed weighs these different inflation signals leading to this meeting and then going forward?

Michael Feroli (1:41)

Yeah. So at the end of the day, the Core PCE measure is the one they really focus on.

CPI and PPI inform estimates of that. There's some debate as to whether you want to look at three-month annualized trends, year-ago trends. I think each participant on the FOMC has a different view of that. Before the meeting, Governor Waller highlighted the improvement in the three-month trend. However, it seems like the sustained above 3% on the year-ago measure is probably what mattered more. So, the trend is what matters, as Chair Warsh said, but the trend, the marginal information on the trend is each data point. And I think, particularly as we look ahead to the next meeting in late October, we're going to have to think about how much weight to put on the one data point we really get between now and the next meeting.

Samantha Azzarello (2:37)

So let's zoom up for a second and talk about the neutral rate. Does this hike imply anything to you about where the Fed sees the neutral rate and how restrictive policy might still be today?

Michael Feroli (2:48)

Yeah, that was one of the more confused aspects of the communication coming out of yesterday. So in the dot plot, the longer run dot is commonly interpreted as the neutral rate. That longer run dot, the medium longer run dot moved up a little bit to three and a quarter percent.

The funds rate right now is just below four percent.

Chair Warsh mentioned that he didn't see it as restrictive. In other words, he didn't see policy rates as above neutral. He also said the hike was to remove a dose of accommodation, neither of which are consistent with how you should normally read the dot plot, which is a funds rate above the median dot should imply policy is restricted. So there is some mixed messaging we're getting out of the committee and its chair in terms of neutral. But I would say for probably most committee participants, they would likely say, and we'll hear in coming weeks when they come out of the blackout, that policy is modestly restricted.

Samantha Azzarello (3:49)

So Mike, you mentioned one more hike potentially this year. How much room, if any, do you think the committee has to pause after this move if the next data prints are different than what might be expected?

Michael Feroli (4:03)

Yeah, so the next meeting is in late October.

You really only get one set of data reports between now and then. One employment report, one inflation report, and so on. So that doesn't give you a whole lot of new information. So I think the committee, if they communicate it well, could make a case that they want to wait and see the effect of this hike before moving. Certainly, in the past, there is precedent for them to move at a quarterly tempo. So we saw that, for example, in the rate hike cycle in 2017 and 2018

So, you know, I do think they have some room here to take a pause before hiking again, but I do think that needs to be communicated well in terms of giving a reason why they would take a pause and not hike. Of course, the easy way to take a pause is if the next set of data are all on the weak side.