Fed's hawkish turn

After Kevin Warsh's first meeting as Fed chair, markets were left a bit concerned about his credibility and the independence of the Fed.

Now, the Federal Reserve has delivered the rate rise that markets were expecting, and it was emphatic, it was unanimous from policymakers, and most of them expect to go further this year.

Uh, according to their own predictions, a dozen policymakers see another rate rise this year.

Four of them see two.

Only two of them think that the Fed is one and done for the year.

So with this hawkish tone, have markets' worries about credibility been put to bed?

Well, the first rate rise in over three years, and it definitely doesn't feel like the last, does it? Warsh sort of framed this hike as insurance against energy shocks, feeding into wider and broader inflation.

He was very still stressing that a policy isn't restrictive, but, I mean, he still said there's a lot of work more to do.

In fact, he said that the plain fact is that inflation is too high, and that it's been too high for too long.

So I mean, I think markets are taking this as a welcome sign, a bit of independence for the Fed, as we're willing to tackle and fight inflation at that high.

I mean, we see bond traders bringing yields back down to 5%, under 5% on the 10-year yields.

Also, exactly as you said, giving a bit of credibility as Kevin Warsh is Fed chair.

The yield curve, as you said, has flattened out overnight, so that's obviously what traders wanted to hear.

Of course, it's absolutely not what President Trump wanted to hear.

We know he wants lower rates, and he was quick to react yesterday.

But it's interesting that he said it was the Fed committee that was hostile, so he didn't personally condemn Kevin Warsh, did he? He sort of allowed him to stand behind the rest of the committee members, most of whom were not appointed by Trump, of course, and which include Lisa Cook, who he's been trying to fire.

And he did sort of put the blame on the others, didn't he, and say that Warsh is dealing with a hostile committee?

Well, when have we seen the FOMC this unified as well? As you said, on the dot plots, 16 of 18 see another hike this year.

Even if we look at the summary of economic projections, for the first time ever since it's been published, zero members see downside risks to growth.

So it definitely feels like the Fed can see more hikes coming, and the economy can absorb them, and I think that really sees where we're going next.

Obviously, we have a big stress test coming the next Fed meeting, days before the crucial midterm elections.

It's all just down to patience, isn't it? Can they keep looking at inflation, or do they, can they wait till December? Who knows?

Well, inflation certainly gave Kevin Warsh cover, if you like, politically, to raise rates yesterday.

It'll be interesting to see if that plays out in the same way as you said, the next meeting that's just days before the midterms, where at the moment the market sees the odds of a hike at more or less 50/50.

A lot of that, of course, will come down to energy prices and just how much further they rise because of the war in Iran between now and then.