The Fed Got a Lot More Hawkish. Markets Say It’s Still Not Enough.

A loudly hawkish Federal Reserve spooked stocks and lifted the US dollar but markets still seem like they didn’t get enough of what they wanted.

• Stocks swooned as the Federal Reserve took a strident step toward a more hawkish policy stance
• Updated forecasts and a fierce Fed chair amounted to a call for higher interest rates both now and in the longer term
• Muted price action in bonds, gold, and bitcoin say the Fed did not deliver enough for the markets’ liking

The Federal Reserve gave markets the fireworks they were bracing for. Rates went up, the projections were revised in a hawkish direction, and Chair Kevin Warsh used his press conference to argue that the labor market needs no defending, that the economy is strong, and that bringing inflation to heel is the remaining task.

Equities got the message. The bellwether S&P 500 sliced through the range it had built over the preceding four days, recovering only partway off its lows into the close.

A genuinely hawkish set of forecasts

The quarter-point increase itself had been fully priced for days, so the markets’ reaction hinged on the accompanying details. The summary of economic projections painted a clear picture. Growth estimates were nudged up for this year and next, the unemployment forecast was marked lower, and inflation projections on the Fed's preferred PCE measure moved higher for 2026 on both the headline and core readings.

The median rate path was steepened to include at least one further increase this year, against a June projection that had rates finishing around where they stood going into the meeting. Among the individual forecasts, only two policymakers thought rates should stay put this year. That left a commanding majority in favor at least one further hike.

Moreover, while long-run forecasts for growth, unemployment and inflation were left alone, the matching projection for the policy rate moved up. In other words, officials expect to arrive at the same economy they foresaw in June but now see higher interest rates are needed to get there. That hints at deeper hawkish conviction than a single hike.

Where the Fed and the markets part company

After this year's tightening, the committee's dots show rates flat through 2027 and beginning to fall in 2028. Traders see it differently. After a second hike by December of this year, they’ve penciled in a further uplift in March and another one by June next year. Where the Fed believes it will be finished once the calendar closes on 2026, markets are pricing about another 50 basis points of tightening to go.

So, it seems that Warsh and company were more hawkish than most traders anticipated – hence the negative response from Wall Street – and also less hawkish than what market pricing is calling for beyond this year.

The markets got a lot, but wanted more

Price action in the bond market seemed telling. A convincingly hawkish Warsh might have been expected to pull tightening forward in time, easing inflation fears further out along the yield curve and allowing the long end some relief. Treasuries attempted precisely that rally and went nowhere with it. It seems traders did not find the Fed hawkish enough for that vote of market confidence.

Gold offered up another curious response. It dutifully turned lower after the Fed rate decision hit the wires – the response to be expected by an asset that yields nothing to a hawkish central bank. While that move erased intraday gains, the metal pointedly refused to surrender its recent lows or challenge the upside breakout secured in early August. Meanwhile, Bitcoin curiously held the floor of its month-long range, shrugging off a negative catalyst for a second day straight having just survived the failure of the Clarity Act in Congress.

The Fed’s lagging embrace of the markets’ hawkish lead and unconvincing price action in key bellwether assets hints that the so-called “debasement trade” came out of the Fed policy announcement bruised but not yet beaten. The Fed’s worldview has changed dramatically in a mere three months. If that is still not enough to earn lasting credibility with markets, US dollar alternatives – be they currencies like the euro, metals like gold and silver, or bitcoin – may soon find a lifeline.

Ilya Spivak, tastylive Head of Global Macro, has over 15 years of experience in trading strategy. He specializes in identifying thematic moves in currencies, commodities, interest rates and equities. He hosts Macro Money and co-hosts Overtime, Monday-Thursday. @Ilyaspivak

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