Warsh leaves a 'decidedly hawkish' mark – One more hike 'should suffice'

The Fed's new Chair Kevin Warsh is making his mark in the institution with a decidedly hawkish bent.

His proposal for a 25-basis point hike was approved unanimously last week, and the short, succinct presser afterwards left markets in no doubt of what his priority is: to bring down inflation.

The economic projections were also upbeat, while the median dots in the dot plot of interest rate projections were nudged higher than anticipated and consistent with one more rate increase in 2026 and no change in 2027 - a whole 50 basis points higher than the Fed had outlined at its June meeting.

Futures markets are now pricing in an additional hike as a certainty by December, with a 50/50 likelihood of a back-to-back hike in November.

We expect one more hike this cycle, which should suffice given the relative lack of second-round inflation effects, unless the situation in the Middle East deteriorates markedly.

However, our call remains highly data dependent and assumes that no further nasty surprises await in the next few inflation releases out of the US.