Investors have largely come to view a Federal Reserve rate hike next week as the base case, according to the latest article by Nick Timiraos, often referred to in markets as the Fed’s key messenger. But the harder question, he wrote, is what comes after that meeting. Timiraos said almost no one inside the Fed believes a single 25 basis point increase would be enough to bring inflation down. If officials do raise rates next week, that would imply they see policy as having been set at the wrong level before, making one move insufficient on its own. He also noted that the Fed has carried out only one one-off rate hike since the 1990s. The article cited Warsh’s past remarks questioning the central bank’s ability to fine-tune policy and his later comment that there is limited evidence borrowing conditions are restraining economic activity. Market pricing has now shifted beyond September alone, with investors expecting at least three cumulative rate hikes by June next year, up from an earlier expectation of two.
BlockBeats reported on Sept. 12 that Nick Timiraos, widely known by market participants as a key Fed messenger, said in his latest article that investors have largely concluded the Federal Reserve will deliver its first rate hike in three years next week. The tougher question, he wrote, is what happens afterward.
Timiraos said almost no one inside the Fed believes a single 25 basis point hike would be enough to push inflation lower. If the Fed chooses to raise rates next week, that would reflect a judgment that interest rates had previously been at the wrong level, and one increase alone would not fix the problem.
He added that since the 1990s, the Fed has carried out only one one-off rate hike. Warsh said in July that he did not think the Fed was good at “fine-tuning.” Analysts said a chair who is skeptical of fine-tuning would be unlikely to raise rates by 25 basis points and then declare the job finished.
Warsh also said last month that there was not much evidence showing borrowing conditions were restricting economic activity. If that argument is used to justify a rate hike, the market would naturally ask how high rates need to go. Without a clear explanation, investors could interpret a single hike as the beginning of a larger tightening move.
For that reason, investors this week are no longer treating the September meeting as a one-meeting question. The market now expects at least three cumulative rate hikes by June next year, up from an earlier expectation of two.
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