Fed Hikes Rates For First Time In 3 Years — Here’s Why It Matters
Prof G Markets
Ed Elson hosts a discussion on the Federal Reserve's first rate hike in three years, analyzing its implications for markets, inflation, and
Key takeaways
- The Fed's unanimous decision to raise rates signals strong institutional unity and reinforces its independence despite political pressure.
- Inflation remains above target, with officials emphasizing that 'sufficient speed' in reaching 2% is key before policy loosens.
Main topics
- Federal Reserve rate hike decision
- Inflation dynamics and monetary policy reaction function
Notable quotes
"We must be confident that underlying inflation is moving to our objective clearly and at sufficient speed." – Fed Chair
Conclusion
The Fed's rate hike underscores its commitment to taming inflation desp
Transcript preview
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I'll be getting personal with actors, chefs, comedians, musicians, and writers I admire. So grab a snack, pull up a chair, and join us. You can watch by searching for Happy Hour with Ina on YouTube or listen wherever you get your podcasts. Don't we all need to have more fun? Speaker 1 (1:08) I'm Mitch Purse, and this week on Confessions of an Elite Athlete, I'm sitting down with Matt Fries, goalkeeper for the U.S. men's national team and New York City FC. We discuss how to prepare for one of the biggest moments of your life. You can hear it all by listening to Confessions of an Elite Athlete on YouTube or wherever you get your podcasts. Speaker 6 (1:39) Money Speaker 5 (1:39) markets matter. If money is evil, then that building is hell. The show goes on! They can never watch the show sell! Speaker 2 (1:49) Welcome to ProfitG Markets. I'm Ed Elson. It is September 17th. Let's check in on yesterday's market vitals. The major indices fell following the Federal Reserve's interest rate decision. More on that in a second. Treasury yields rose, the dollar strengthened, and finally bank stocks had their worst day since February on concerns that higher rates will slow lending growth. Speaker 2 (2:14) Okay, what else is happening? The Fed just raised rates for the first time since 2023. In a unanimous vote, officials raised rates by a quarter point, and the Fed's forecast shows an additional hike is likely this year. The hike is an attempt to cool inflation, which has been above the Fed's target for five and a half years. And in his remarks, Walsh said that, quote, this summer's inflation readings do not tell me that underlying trends have meaningfully improved. Investors largely had expected this outcome on Calci, the odds of a rate high grossed 88 % ahead of the decision. Following the decision, the yield on 10-year treasuries hit a 52-week high. The 10-year climbed back above 5 % and stocks fell. Joining us to discuss the Fed's decision and what to make of it, we are joined by Robert Armstrong, author of the unhedged newsletter and US financial commentator for the Financial Times. Rob. It's great to see you. We have finally gotten a rate hike, a quarter point hike, a unanimous decision. Lots we could say, but I'll start with your initial reactions to the news. We Speaker 3 (3:22) can put to bed the theory that Kevin Warsh is Donald Trump's sock puppet. I had never bought that theory, particularly for the simple reason that I don't see what's in it for Warsh. playing the part of the sock puppet. He had nothing to gain by doing that. He's in a good position to go his own way. So that, I think that was becoming clearer as the weeks went on, but now it's very clear he has hiked despite the threats and protestations of the president. So that is point number one. Point number two, and you mentioned this, which I think is very interesting and very important for this hike, is the unanimity. It was not at all obvious going on that all the voting members were going to agree on this outcome. Several members of the committee had made slightly dovish noises going in. So this is a very good sign for the Fed chair's credibility, or might be, right? There's two ways this may have happened. Either he wanted to hike and he got everybody on board or almost everybody was on board and he wasn't and he joined the crowd so he didn't look like a weenie, right? You know? But there is a little interesting detail you might have noticed about this. In the notorious dot plot, which is this graphic they include, which shows for this year and several coming years, what... each member of the committee believes is the appropriate monetary policy, there were two dots that showed that the appropriate monetary policy for the end of this year is the rate we were at before the rate hike. So what are those two people thinking? We agree, we vote with you to raise the rate today, but we think we're going to cut by the end of the year? So that was like this weird like... What are we doing? Maybe that's a good argument to go with Warsh and dismiss the Das Blatt altogether, get rid of the thing. But the important point was the committee as a whole agreed. That puts them in a strong position politically, sends a strong message. Very important. I think the third thing I would point out is with each meeting, we're finding this Fed chair. is finding his feet. And we're getting to know him a little bit better. And, you know, his first two public appearances were terrible. His appearance at Jackson Hole was better. I think with this appearance, we get a still clearer sense of who he is. And we have a mantra now. And the mantra is this. We must be confident that underlying inflation is moving to our objective clearly and at sufficient speed. That's the phrase he used in Wyoming. That's the phrase he used today. And what he's doing there is describing the Fed's reaction function. He's telling the world this is the test we apply to see whether monetary policy is where it needs to be. And there are some vague elements of that mantra. What is sufficient speed? Speaker 3 (6:36) etc. But, you know, that's the mantra. Are we at target? Target is 2 % PCE. Are we moving to it fast enough? If the answer is no, we're going to tighten policy. That's a reasonably clear statement of the reaction function, and I think gives markets something to work with that they need. Speaker 2 (6:55) Why do you think it was unanimous now? Because inflation has been hot for a long time. We had the same inflation report the previous month. We've had even higher readings before that. And it was such a large debate in politics, in economics, everyone going back and forth. And then suddenly, on this occasion, they all agreed with each other. Yes, inflation is a real problem that we need to do something about now. Well, Speaker 3 (7:27) remember what we talked about last time on the show, which is that In central banking, how you say it is more important than what you say or do, right? And so if you're going to move, it helps a lot to move. Speaker 3 (7:46) unanimously. It, it just, it means the move is more effective, right? You know what I mean? So once I wonder if in that room and when we get the, the meeting minutes in a couple of weeks, we might get a slightly better sense of this. Once you get to a majority and it's clear, you're going to hike. Everybody's like in for a penny and for a pound. If we're doing this, we're doing it. You know, we don't want to say to the world, we're a divided committee. You know, it's one thing to have 10 votes and then two dissenters. I think that's normal and fine. But if you're going to be like, you know, whatever it is, a 60 % of the committee voting for it, no, I think let's go on. And by the way, Ed, it's particularly important at this time when people are still asking questions about the independence of the institution. So here is the Fed saying, we know. We're listening to what the president is saying. And if you screw with one of us, you're screwing with all of us. Right. You're not going to you're not going to divide this committee. Right. And that's a statement about Fed independence, which I think is a positive one. Speaker 2 (8:56) Let's talk about the implications here. Clearly, the point is to get inflation under control. But I think something that a lot of people are debating is, will this actually move the needle, considering that the problem, the real problem is a war in Iran causing a supply shock? to oil, oil prices then rising, causing higher gas prices, higher diesel prices, and funneling through to everything else. The question being, okay, we're