Fed's hawkishness questioned as markets overreact

The Federal Reserve delivered a 25 basis point rate hike yesterday, as widely expected, and indicated another increase before the year closes. Markets reacted as if the tone was hawkish, with equities, bonds, and gold all dropping while the US dollar strengthened. Yet the question remains: was the decision genuinely hawkish, or did traders simply overreact to what was already priced in? A comparison with market expectations, analyst consensus, and prior Fed communication offers some clarity.

STATEMENT 

The statement's most striking elements were the unanimous vote and the revised language around inflation. Analysts had anticipated one or two dissents favoring a pause, but the decision was unanimous. While this could be interpreted as slightly hawkish, it carries little weight given the context and the Fed's credibility concerns. 

Back in July, the Fed noted inflation remained high, partly due to supply shocks affecting sectors like energy. Yesterday, that supply shock reference was dropped. Again, this is not particularly significant, as many Fed officials have recently argued that the current persistence and breadth of inflation cannot be solely attributed to recent supply shocks. 

Even Governor Waller pointed out in July that core inflation had started rising before the oil shock, and more recently said higher energy prices and tariffs were no longer a major source of ongoing inflationary pressure. 

SUMMARY OF ECONOMIC PROJECTIONS AND DOT PLOT

The macroeconomic projections largely matched consensus: unemployment was revised down due to recent labor market trends, inflation was revised up because of persistently higher energy prices and AI-driven demand, and growth projections were slightly upgraded, though there was no strong agreement on the growth outlook. 

The dot plot drew most of the attention, and here the Fed appeared less hawkish than expected. The consensus was for one additional rate hike in 2026 and another in 2027. Market pricing, however, had already factored in one more hike in 2026 and two more in 2027. 

The Fed aligned with the 2026 consensus by projecting another hike, but on 2027 it signaled rates would stay unchanged, with cuts only arriving in 2028. The dot plot reflects the committee's bias, and it clearly indicates little appetite for significant tightening. The Fed did not even project reversing the three rate cuts delivered in 2025. 

Some commentators viewed the higher-for-longer stance in 2027 as hawkish, but that distinction hardly matters. The Fed will pivot to cuts as soon as oil prices fall or soft economic data emerges. What truly matters is the bias, and that bias is not strongly hawkish.

PRESS CONFERENCE

I was surprised to hear people claim Fed Chair Warsh sounded more hawkish than expected during the press conference. In my preview, I noted that the consensus was for Warsh to largely repeat his Jackson Hole speech. That is precisely what he did. 

Comparing his press conference remarks with the Jackson Hole speech shows they are nearly identical, with only minor adjustments to reflect the rate hike. If you need confirmation, ask ChatGPT to compare the speeches, and it will tell you this: 

"The second text (Jackson Hole) appears to be a substantial source/template for the first text (press conference remarks), with several phrases, arguments, sequencing choices, and data points carried over almost directly. The first text, however, reframes the material as a September 16 FOMC press conference following a 25 bp rate hike, whereas the second is a Jackson Hole speech focused on monetary-policy principles and the economy".

CONCLUSION

In short, the Fed was not more hawkish than expected; if anything, it was less so. If you observe markets retracing yesterday's moves, that explains why. The initial reaction was an overreaction, and prices are now returning to pre-FOMC levels. 

Going forward, I would monitor the Middle East situation closely, as $100 oil, rate hikes, and elevated bond yields could pressure the administration to seek an end to the conflict. Watch for signs of de-escalation, as that would likely weigh on oil prices. Oil has been the primary driver across markets due to its impact on inflation and rate expectations. Lower oil prices could trigger a dovish repricing and support risk assets, while the opposite holds if tensions escalate. 

Economic data also deserves attention. When market pricing and expectations stretch too far, reversals can happen quickly. If data begins to surprise to the downside, signaling slower economic activity, aggressive rate hike bets will likely be pared back.