Federal Reserve Hikes Interest Rates and Shifts Policy Rate Trajectory
The Federal Reserve has surprised markets with its latest decision, hiking the target range for the Federal funds rate by 25 basis points. This move is seen as a sign of a stronger commitment to defending monetary policy independence. Bas van Geffen, Rabobank's Senior Macro Strategist, notes that the FOMC's new set of economic projections indicates a higher policy rate trajectory is required to reach similar inflation outcomes.
The Fed's reaction function has been reshaped, with a revised terminal rate assumption raised from 3.00-3.25% to 3.25-3.50%. This change in expectations suggests fewer interest rate cuts are likely in the future. Van Geffen still believes that yesterday's decision may be a one-and-done hike but now foresees only one cut in 2027 and another in 2028.
The FOMC's projections suggest that by the time President Trump leaves office, the policy rate may be higher than when Warsh took the helm at the central bank. This indicates a commitment to maintaining monetary policy independence.