Fed says policy 'hard to describe as restrictive', one more hike now expected

As expected, the Fed raised its policy rate by 25 basis points to a range between 3.75 to 4.00% on Wednesday, though it was the hawkish communications that stole the show.

Right off the bat, the vote to raise rates was unanimous, which we were surprised by given that a handful of officials have played down the possibility that they would opt for a hike in recent communications.

Warsh said that inflation had been too high for too long, and that policy was hard to describe as restrictive - an indication that the Fed sees room to raise rates further if needed. The median dots were revised up as well, consistent with one further rate increase this year and no change in 2027, after the Fed had pointed to a cut in June.

The dollar rallied sharply off the back of the announcement, with the EUR/USD pair falling below the 1.15 level for the first time since late July.

Treasury markets also stabilised, a sign that traders are relieved the Fed is taking concrete action to restore price stability rather than offering empty platitudes.

What matters now is where rates go from here. While we’ve seen enough from the Fed to change our call in favour of another hike in December, we would still argue that aggressive tightening beyond then remains unwarranted even if the energy situation doesn’t resolve itself by then.