Trends Matter, So Does Fed Credibility

The Fed’s September rate hike reinforced Chair Warsh’s inflation-fighting credibility, but his less transparent communication is likely to increase near-term market volatility.

• The Fed unanimously raised rates by 25 basis points to 3.75–4.00%, its first hike in three years, following the ECB’s rate increase the previous week; markets had assigned about a 90% probability to the move.
• Warsh justified the hike with a stronger economy, inflation readings that remained above the 2% target, and worsening geopolitics, while suggesting that policy might not yet be restrictive.
• The dot plot showed that 16 of 18 FOMC members expected at least one more hike in 2026, including four members who saw scope for two; the Fed lowered its unemployment forecasts to 4.1% and modestly raised its 2026 inflation forecasts.
• Warsh argued that monetary policy cannot directly reverse supply shocks such as a closed Strait of Hormuz, but can limit second- and third-order effects; he attributed higher long-term yields to stronger growth, competition for capital from AI-related issuance, and geopolitics.
• Equities sold off, the 30-year Treasury yield remained elevated, and the 10-year yield ended slightly below 5%; President Trump publicly called for rates of 1% or less.

Takeaway: Man Group expects continued pressure on equities and one further Fed hike in 2026, while warning that the absence of forward guidance may keep bond and equity markets confused and volatile despite the Fed’s restored credibility.