Warsh goes hiking

Like the least outdoorsy person in your friend group, the Federal Reserve just hiked for the first time since 2023.

In a widely expected and unanimous decision, the central bank raised rates by a quarter percentage point today. Despite fears of an economic slowdown, new chair Kevin Warsh emphasized that inflation is still the Fed’s number one enemy, and noted that GDP growth and the labor market have been resilient, which means a single rate hike won’t derail the entire economy.

Inflating expectations: The Fed’s latest projections indicate that policymakers don’t think inflation will return to its 2% target until 2029. The Fed’s statement specifically pointed to geopolitical risk as a source of uncertainty; spiking oil prices have already nudged inflation higher since the beginning of the Iran war.

As for the near term, 16 out of 18 FOMC officials project at least one more quarter-point rate hike coming this year. Traders are currently pricing in a 50% chance of that hike arriving when the Fed meets in October.

“If the economy keeps up like it has, the Fed is telling us that we may not see a cut until 2028,” LPL Financial Chief Economist Jeffrey Roach explained. “Instead, another hike may be on its way.”

A new era of rate hikes

President Trump, who installed Warsh with the implicit directive to slash rates, is unlikely to relish the thought of more hikes. But at the same time, today’s decision could instill markets with the confidence that Warsh is not going to be a presidential pawn, nor will he underestimate the risk of inflation meaningfully accelerating.

“Our initial view is that the Fed has largely validated the credibility narrative that had developed since Jackson Hole,” Janus Henderson Head of Global Short Duration & Liquidity Daniel Siluk noted. “Chair Warsh faced increasing pressure to align policy action with increasingly hawkish rhetoric, and today’s decision reduces the risk that investors question the Fed’s inflation-fighting resolve.”

What this means for markets

Investors sold off stocks after today’s decision, anticipating that another hike could be on the horizon. Higher interest rates generally stymie equities, especially growth stocks, because they make borrowing costs higher for businesses and pour cold water on economic growth.

But history shows that over the last 21 tightening cycles, the S&P 500 has climbed during the 12 months after the first hike 81% of the time, with an average gain of 6.7%. In other words, don’t panic-sell just yet.—LB