"Hawkish Rate Hike"! Walsh's "Major Shift"

On September 17, the Federal Reserve unanimously approved a 25 basis point rate hike at the FOMC meeting, raising the federal funds rate target range to 3.75%-4.00%. This was a "words and deeds aligned" hawkish hike: Chairman Walsh's remarks at the press conference were fully consistent with the hawkish tone he set at the Jackson Hole meeting.

According to Follow Wind Trading Desk, UBS immediately released a report interpreting this rate hike. The report shows that Walsh repeatedly emphasized at the post-meeting press conference that current financial conditions are “not restrictive,” and that this rate hike only removed “a dose of accommodation,” with wording much tougher than the market expected.

Price stability is the foundation of economic growth, and I believe today we have taken an important step toward achieving it. We are doing this in part by removing this dose of accommodation.

Walsh explicitly refused to assign any "operational significance" to the neutral rate, indicating that his policy framework has distanced itself from that of previous chairs. The dot plot shows that the median forecast among FOMC members is for one more rate hike this year, with the median rate of 4.1% maintained through 2027.

UBS economist Jonathan Pingle and his team assessed that, compared to the last three or even more previous Fed chairs, Walsh’s policy response function has undergone a substantive change: more sensitive to financial conditions, less sensitive to labor market impact, and setting a higher threshold for “restrictive monetary policy.” This judgment has a direct impact on market expectations for the next four years.

Three Key Variables Behind the “Firm and United” Decision

At the press conference, Walsh disclosed three new variables that have influenced decision-making since July, breaking down the logic behind this rate hike.

First, the labor market is strong, as evidenced by the robust August jobs report.

Second, inflation trends remain worrying, with recent CPI data providing no positive signals.

Third, geopolitical developments and their impact on energy prices.

Walsh stated: “The third thing that changed over the last seven weeks is geopolitics. Hot spots around the world are everywhere, and our perception of the most likely or least likely directions for geopolitics has changed. These three points together led to today’s firm and united decision.”

He also specifically mentioned that since taking office, he has had multiple exchanges with other central bank governors around the world—a rarity in previous Fed decision-making frameworks. Analysts point out that Walsh may pay more attention to policy dialogues among global central banks than his predecessors.

“Not Hurting the Labor Market,” but Walsh’s Logic is Different

Walsh stated at the meeting: “I don’t think we need to harm the labor market to achieve our goals. I don’t see the two components of our dual mandate—price stability and full employment—as being in opposition in the medium term.”

Although this sounds mild, the report’s interpretation is quite the opposite.

According to the research report, this is not the “labor market looks good but inflation is too high” conventional logic; rather, Walsh believes higher rates will not materially impact job expansion. His tolerance for shocks to the labor market—or rather, his indifference to them—is itself a core feature of his policy framework.

In other words, Walsh is not saying “I will carefully protect employment,” but more like “Rate hikes will not hurt employment, so I have no reason not to raise rates.”

Sensitivity to Supply Shocks: A New Policy Signal

Analysts also point out that Walsh appears more sensitive to energy price shocks than previous chairs.

This may stem from a critical reflection on the Fed’s inadequate response during the COVID-19 pandemic. Historically, including during the 2007-2008 period, some within the Fed believed oil price spikes should be “looked through” as energy shocks would eventually fade naturally. When Walsh previously served as a Fed governor, he sympathized with Charles Plosser and Richard Fisher’s focus on the secondary inflationary effects of oil prices.

Now, as chair, his stance has shifted. Walsh mentioned “second round effects” at the meeting—a phrase closer to ECB policy language and distinct from the Fed’s traditional “energy price pass-through to inflation” framework.

This means Walsh prefers to act proactively in the face of supply shocks, bringing inflation back to target instead of waiting for shocks to fade naturally before adjusting.

Thus, according to the report, Walsh’s response function differs from previous chairs in three major ways:

First, greater sensitivity to financial conditions. He pays more attention to markets than his predecessors, but in the opposite direction—he shows clear indifference to market downturns, ignoring them directly at the Jackson Hole speech and not showing concern at today’s press conference.

Second, less sensitivity to the labor market. His dual mandate statement actually downplays the labor market’s constraints on monetary policy.

Third, a higher threshold for “restrictive policy.” He refuses to acknowledge that current rates are restrictive, meaning he is willing to push rates higher and keep them there for longer.

UBS concluded:

Overall, compared to the last forty years, we may now face an FOMC with a stronger hawkish response function—a situation that will likely persist for the next four years.

Dot Plot: Writing Lower Rates but Acting as If Rates Are Higher

This dot plot reveals an intriguing internal contradiction.

The median projection raises the FOMC’s longer-run dot from 3.1% to 3.2%. However, the rates path committee members actually wrote down—4.1% through 2027, declining to 3.9% in 2028, and further to 3.6% in 2029—means that throughout the forecast period, the nominal policy rate remains above the long-run equilibrium point.

This shows that “the FOMC is actually behaving as if operating above its nominal long-run equilibrium rate.” In other words, committee members believe that achieving price stability over the next three to four years requires higher actual rates.

In addition, Walsh himself again did not submit a dot—only 17 of the 18 data points extend beyond 2027. Analysts believe, “It’s clear that one participant considers three-year-out forecasts to be of little practical value.”

In the SEP inflation outlook, this year’s core PCE inflation forecast was raised from 3.3% to 3.4%, slightly above UBS expectations; but the path over the next three years aligns with returning to the 2% target. Notably, despite sharply raising the rate outlook, the GDP forecast was also revised upwards—from 2.2% in 2026 to 2.3%—while the unemployment rate forecast was cut sharply from 4.3% to 4.1%, expected to remain below the long-run equilibrium of 4.2% throughout the forecast period.

UBS Interest Rate Path Forecast

According to the UBS research report, the baseline forecast is as follows:

• October FOMC: Skip a rate hike (matching the watch-and-wait mode of June-July 2026, also avoiding a rate hike six days before the midterms)

• December FOMC: Another 25 basis point rate hike

• 2027: No change, begin easing in June

However, the bank notes that after today’s press conference, the risk to this rate path is clearly skewed to the upside.

Walsh’s attitude toward forward guidance at the press conference was quite straightforward:

My responsibility is not to provide forward guidance, but my commitment in June was to reiterate to the American people and to all listening that we will deliver price stability… Today’s actions begin to show we are serious, we will fulfill the price stability goal, and, as stated in the announcement, we will do so in a more timely manner.