Economists at France's Natixis believe the Federal Reserve's policy stance may be more hawkish than recent public remarks from officials suggest, with the latest rate increase not necessarily marking the end of the current tightening cycle and another hike possible before year-end. In a new research note, Natixis economists Christopher Hodge and Selin Aker provided a comprehensive analysis of the Federal Open Market Committee's rate decision, policy statement, and economic projections dot plot, examining the Fed's current policy considerations and the path of future rates.

This rate hike was the path of least resistance, though its practical effect on cooling inflation remains limited. Hodge and Aker noted that the FOMC's first rate increase since 2023 represented the least resistant policy option. The economists explained that holding rates steady would have further damaged the Fed's policy credibility, while a 50-basis-point hike would have been too aggressive and constrained policymakers' room to maneuver in the coming months. They said the rate hike will struggle to fundamentally solve inflation problems but buys the FOMC time to assess whether August's hotter-than-expected inflation data was a temporary blip or signals a deeper risk of resurgent inflation. The economists also noted that concluding a tightening cycle with a single rate hike is a rare scenario, and continuing to raise rates during a period of disinflation is itself an unconventional approach. Given the difficulty of consistently delivering favorable inflation data, they have incorporated a December rate hike into their base case, though they do not rule out this being the final increase of the cycle. Policymakers likely believe a modest adjustment alone will suffice to push inflation lower, making forthcoming inflation data the key driver of Fed decisions.

The policy statement contains both hawkish and dovish signals, while the dot plot points to additional rate hikes this year. The latest Fed statement includes a phrase stating that "this action will help bring inflation back to the Fed's 2% target in a more timely manner." Hodge and Aker said the sentence leans dovish overall, indicating the FOMC believes this hike has substantive effect. Regarding the Summary of Economic Projections, the economists noted that most FOMC members expect one more rate hike in 2026. Fed Chair Kevin Warsh again declined to submit his own economic projections due to his disagreement with the forward guidance mechanism. A total of sixteen participating officials expect another rate hike this year, with the median dot showing rates holding steady through 2027 before cuts begin in 2028, while significant divergence of views is evident within the dot plot itself.

The Chair's press conference revealed key divisions, with stark differences in assessments of policy tightness. Regarding Fed Chair Kevin Warsh's press conference, the two economists said the event offered few highlights, though the brief format may become the norm going forward. Warsh said at the press conference that it is difficult to describe the overall financial environment as restrictive, noting the rate hike merely trims some degree of accommodation. Hodge and Aker said the phrase "trimming accommodation" is the key takeaway from the briefing. It reveals Warsh believes the current policy rate remains in accommodative territory, while Governor Waller holds the view that policy is "moderately restrictive" — two clearly different positions. The economists judge Waller's view is closer to the committee's center, but if Warsh represents the thinking of the majority of voting members, the number of future hikes could exceed market expectations.

In conclusion, Natixis believes the Fed's future policy decisions will continue to hinge on incoming economic data. As Friday's consumer price index showed, monthly inflation figures are highly volatile, and stringing together a series of favorable inflation readings is no easy task. Based on this pattern, Hodge and Aker have incorporated a December or January rate hike into their forecast scenario. With the Fed internally divided over the current degree of monetary tightness, the ebb and flow of inflation data will continue to determine whether the Fed presses the rate-hike button again before year-end.