DWS: Main motivation for Fed rate hike was credibility
Christian Scherrmann, Chief US Economist at DWS, responds to the Federal Reserve meeting:
'The Federal Reserve increased its policy rate by 25 basis points—the first such move since 2023—raising the rate to a new range of 3.75 to 4.00 percent. The decision was unanimous, and the accompanying statement said the rate hike would help achieve the 2% inflation target more quickly.
Although central bankers anticipate inflation cooling in the upcoming quarters, they likely recognize that further action is needed to reach this goal. The median dot plot indicates a preference for an additional rate increase in 2026.
In 2027, however, preferences diverge. Some indicate another rate increase, some see rates holding steady, and a few indicate that lower rates might be warranted. Interestingly, the longer-run policy rate, associated with the neutral rate, increased from 3.1% to 3.2%. This suggests that central bankers anticipate a slight structural shift.
To us, a cycle of one or two rate hikes is more akin to fine-tuning the economy than recalibrating monetary policy. However, if inflation does not cool down in the coming quarters, one or two rate hikes may not suffice.
Similarly, one or two rate hikes will likely not solve problems caused by external shocks, such as rising oil prices and renewed uncertainty from tariffs. Nevertheless, there are good reasons to believe that inflation will trend lower and that tightening to the point where domestic demand slows is unnecessary.
Overall, we believe the main motivation this time was credibility, given bond market pricing and recent developments in oil markets. Despite his hawkish stance, Fed Chair Warsh's optimistic outlook on the economy may be music to many ears.'
