Fed sees 'more hikes rather than less' – Hawkish dot plot clashes with inflation forecasts

One of the more surprising aspects of the announcement was the disconnect between the hawkish dot plot and the inflation forecasts, which were largely unchanged from June. Core PCE is still seen falling from around 3.4% this year to 2.5% in 2027, before then easing to 2.2% and 2.0% in the following two years.

The committee expects to tighten policy more aggressively while still anticipating the same disinflation path - effectively betting that tighter policy will bring inflation down faster.

The growth and employment forecasts suggest that the Fed sees minimal fallout from hiking further. The GDP projections were upped in every year through 2029, all sitting above the Fed's own estimate of potential growth, and unemployment is expected to hold near 4.1% out to 2029. 

We have seen enough from the Fed to concede defeat and change our “one and done” call. We now expect one more hike in December, with the balance of risk from the September projections skewed toward the Fed doing more rather than less if inflation does not cooperate.

However, we would still argue that aggressive tightening remains unwarranted. Core inflation is contained, higher Treasury yields are doing much of the Fed’s heavy lifting and the labour market is exhibiting more slack than we think, in of itself, would warrant aggressively higher rates.

We are not rushing to change our view on the dollar - our near-term projections had already accounted for a degree of Fed hawkishness, while the stalemate in Iran, higher oil prices and sell off in bond globally make us confident in our call for no more than a modest sell off in the greenback over our forecast horizon.