Hi YXI friends,

If I had to describe yesterday’s FOMC in one word, it would be “unnecessary”. Why? The Fed was muddled in uncertainties and a lack of clarity.

While the Fed treats both tariffs and the oil price shock as “one-off” events, there have been just too many supply-side shocks over the past 5 years to keep inflation above target.

This is particularly dangerous, as a sustained above-target trend could set the forward inflation expectations at an entrenched high level too. The result will be an upward drift in long-term neutral interest rates, making the cost of borrowing (and speculating!) higher.

Tariffs clearly have exerted a longer-than-expected impact on goods inflation, while there is no way of knowing how long the current oil price shock could last either. Therefore, while the Dot Plot was much unchanged, yesterday’s FOMC leaned more hawkish. Stephen Miran was the only dissenter (preferred a lower rate by 25bp), as Waller moved to the majority.

The FOMC pencilled in a median projection of 1 cut for the year, which, given the tone of a stable labour market and higher inflation concerns, may not arrive at all. After the FOMC, the Fed Funds market has erased virtually all hopes of a cut in 2026.

The Fed also judges US growth to be robust (therefore, no “stag” in “stagflation”), which could provide comfort for sustained base rates above 3% (as the Projections also show).

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