Fed matches hawkish rhetoric with hawkish action

Without delivering the full 100bps, the US Federal Reserve (Fed) still managed to outhawk the markets through the September dot plot, economic projections, and the press conference, reinforcing Fed chairman Jerome Powell's hawkish message at Jackson Hole.

What happened

The Fed delivered a 75bp hike at its September meeting, in line with consensus expectations. Following the hawkish messaging from the Federal Open Markets Committee members in the run-up to this meeting, the market has moved in recent days to price in another 'jumbo' hike for today and a higher peak rate of 4.5 per cent in March 2023, while taking out some rate cuts that had been priced. The updated dot plot showed a larger increase in the end-2023 median rate, from 4.1 per cent to 4.6 per cent, and a 'higher for longer' rate trajectory, with the end-2024 median rate at 3.9 per cent.

The Summary of Economic Projections (SEP) showed weaker growth and higher inflation forecasts, with a higher increase in the unemployment rate, which is now expected to stabilise at 4.4 per cent throughout 2023-2024. This means that Fed officials now believe that bringing inflation back to target (or modestly above) requires larger easing in the labour market than previously thought, and potentially a recession.

In the press conference, Fed Chair Powell clarified the SEP message. Given the current situation is outside of historical experience, the economy may be able to withstand this tightening without going into recession. At the same time, he did note huge uncertainty around economic outcomes, stressing that the chances of a soft landing are indeed diminishing as policy needs to be more restrictive for longer than previously anticipated.

Our interpretation

Without delivering the full 100bps, the Fed still managed to outhawk the markets through the September dot plot, the SEP, and the press conference, reinforcing Powell's hawkish message at Jackson Hole. As data continue to point to inflation pressures becoming broader and more entrenched, and moving from predominantly energy costs to services, fighting inflation remains the Fed's singular point of focus. At the same time, continued economic strength and a hot labour market point to a limited trade-off - at least for the time being - between growth and inflation.


As more clarity on the Fed's current policy reaction function emerges, we believe the bar for major central banks to turn less hawkish going into year end is very high. The long-awaited central bank 'pivot' now seems further away. Until we see strong data evidence of monetary policy tightening transmitting to the real economy, the Fed will continue on its hiking path. This reinforces our conviction in the base case scenario of a hard landing in 2023.

While we note that if financial conditions tighten significantly, we may well see an earlier pause, we are far from that right now and uncertainty remains very high given the many moving parts. From a medium-term perspective, we continue to think that a US 10-year real rate above 1 per cent is unsustainable but again it will take time for related damage to come through.