Fed Under Warsh Is "More Hawkish Than Expected": "At Least Three More Hikes"

Financial News  

The Fed under Chair Kevin Warsh is being viewed as far more hawkish than expected. As a result, forecasts are emerging that the Fed will raise interest rates at least three more times.
President Donald Trump installed the Fed chair to lower interest rates, but the chair is taking the lead in pushing for rate hikes.

U.S. business outlet CNBC reported on the 18th (local time) that the content of Chair Warsh's press conference on the 16th had made Wall Street nervous. Wall Street is particularly focused on three remarks Warsh made at the press conference following the two-day FOMC meeting.
The first was his remark that he had removed "a dose of accommodation." At the time, he characterized the 0.25-percentage-point rate hike not as the start of monetary tightening, but merely as the withdrawal of "one painkiller" that the Fed had supplied to markets.
Although rates were raised to 3.75%-4.0%, Wall Street interpreted his comments as meaning that this level was not high enough to put pressure on the economy or financial markets.
In other words, Warsh is far more hawkish than expected.

Warsh went on to say at the press conference that the U.S. economy was "solid" and that financial conditions were also less restrictive.
This means that the U.S. economy, the real economy and capital markets are strong enough to withstand higher interest rates.
Wall Street interprets Warsh's description of the economy as solid as a sign that he intends to raise rates aggressively in the future. Because the risk of an economic retreat caused by the shock of higher rates is low, they say he was emphasizing that there is ample room to raise rates further to rein in today's high inflation.
Wall Street believes Warsh can wield the rate-hike sword with clear justification.

Markets are shifting toward two consecutive rate hikes this year instead of one additional hike.
Major investment banks, including Goldman Sachs and Bank of America (BofA), have added a 0.25-percentage-point hike in October to their base-case scenarios. They abandoned their previous forecasts that rates would be held steady in October because the midterm elections are scheduled for Nov. 3.
The probability of an October hike on the Chicago Mercantile Exchange (CME) Group's CME FedWatch Tool also jumped from 42% to 58% in one week.
BofA also expects interest rates to rise in December this year.
According to the CME FedWatch Tool, the benchmark interest rate forecast for the end of next year stands at 4.635%. This implies that the Fed will raise rates by a total of 0.75 percentage point in three moves, lifting the federal funds (FF) rate target range, the benchmark rate, to 4.50%-4.75%.
There are also projections that the number of rate hikes could exceed three.
James Egelhof, chief U.S. economist at BNP Paribas Securities, said the Fed could raise rates more than three times, potentially through substantial hikes.

[email protected] Song Kyung-jae Reporter