Fed's Hawkish Shift Falls Short of Market Expectations

The Federal Reserve has taken a more hawkish stance on monetary policy, but markets are still calling for even tighter interest rates. The Fed's updated forecasts and statements from Chair Kevin Warsh suggest that higher interest rates will be necessary both now and in the longer term.

While stocks initially fell in response to the rate hike and revised projections, they later recovered some losses. However, bond markets, gold, and Bitcoin all showed muted price action, suggesting that the Fed's move was not hawkish enough for market expectations.

The Fed's median rate path now includes at least one further increase this year, against a June projection that had rates finishing around their current level. The committee's long-run forecasts for growth, unemployment, and inflation were left unchanged, but the matching projection for the policy rate was moved up, hinting at deeper hawkish conviction.

Despite the Fed's more aggressive stance, market pricing is still calling for even higher interest rates beyond this year. Traders are penciling in a further uplift in March and another one by June next year, suggesting that the Fed may need to tighten its policy even further to meet market expectations.