The Fed faces the music

The Fed hiked rates by 25 basis points yesterday, bringing the fed funds target to 3.75-4.00%. This was a unanimous decision, signaling the central bank's commitment to fighting inflation.

Chair Warsh characterized the hike as removing accommodation, implying more increases are likely. The Summary of Economic Projections supports this, with the median forecast pointing to a year-end target of 4.00-4.25%. Fed funds futures price in a reasonable chance of further tightening in October and December.

Warsh appeared hawkish and confident, restoring market credibility despite pressure for rate cuts. The 10-year Treasury yield responded by breaching 5%, suggesting the market is pricing in continued policy tightening. Uncertainty remains regarding the exact path and timing of future hikes.