Fed decision on deck: Get set for a ‘hawkish’ hold, says Macquarie

The eyes of advisors and investors will be on Kevin Warsh again this week as he hosts his second meeting as Federal Reserve chair. Financial services company Macquarie doesn’t think that advisors will see a change in interest rates at the Federal Reserve Open Market Committee meeting, but there could be some details that will influence how they deal with clients over the coming months.

The meeting began Tuesday and ends Wednesday, when the central bank will provide its statement on interest rates. 

“The FOMC is likely to once again leave the federal funds rate unchanged this week in the 3.5% to 3.75% range,” said David Doyle, head of economics at Macquarie Group, in a note Monday. However, Doyle adds that, for the first time this year, the decision appears to be somewhat ambiguous with markets pricing in an approximately 35% chance of a hike.

Other observers have also noted the one-in-three chance of a rate hike this week, as well the importance of Warsh’s tone when he discusses the decision.

Voting will be key

For Macquarie, Warsh’s tone, as well the committee members’ voting, will be key. “In addition to the rate decision, the market may focus on whether any voters dissent from the decision, any statement language changes, and the communication from Chair Warsh during his press conference,” he said. “In our view, in the event of a rate hold there are likely to be dissents with the number hinging on the extent to which the statement language shifts in a hawkish direction.”

“We continue to anticipate that the next policy move is likely to be a hike with the most likely timing in December,” Doyle added.

On Tuesday morning the CME’s FedWatch tool puts the probability of rates being unchanged at 70.6% for this week’s meeting, while a hike to between 3.75% and 4% has a likelihood of 29.4%. However, the tool, which updates in realtime, had just a 9.8% probability of unchanged rate for the Fed’s December meeting, and the likelihood of a hike to between 3.75% and 4% is 35.6%. The possibility of an increase to between 4 and 4.25% at the December meeting is 37.1%.

Last month the Fed kept to its path of keeping its policy rate steady at 3.5% to 3.75% in its first meeting with Warsh in the hotseat. During the press conference that followed the June Fed meeting, Warsh said that the central bank had a “good family fight” over interest rate policy. While the statement that accompanied the decision was approved by a 12-0 vote, minutes from the Federal Open Market Committee’s June meeting, however, shed light on the divisions that were at play. 

Statement details

Macquarie’s Doyle notes that June's statement, the first released under Chair Warsh, included a dramatic reduction in the statement's length to just 130 words, down from 341 in May.

The description of unemployment may be upgraded, according to Doyle. “This was ‘changed little’ in June. Since then incoming data have shown another down tick.”

“Risks to any further changes on statement language skew in a hawkish direction with the potential for the inclusion of a sentence that may suggest a tightening bias ahead,” Doyle added.

This could be a key detail for advisors, influencing their forward planning with regard to financial decision making for families and investors.

Other observers also think that advisors could see some dissents in this week’s Fed decision. “With oil prices remaining volatile and inflation expectations at risk of de-anchoring, we don't expect the Fed can hold with the same conviction it's shown recently,” said Michael McGowan, chief investment strategist at Pathstone, in a note Tuesday. “If the Fed holds, potential dissents in favor of hikes could be an interesting tell.”

Data dependent path forward

But McGowan says there’s also a real question about whether a hike would even be effective against a supply-side shock, noting that tightening doesn’t put more oil on the market or impact AI demand. “From here, the path forward will be data-dependent,” he said. “We'll be watching inflation prints, labor market data, and oil prices closely for signs the picture is shifting."

Advisors may want to consider that the near-term takeaway isn't the hold itself — it's the tone. A hawkish hold with visible dissents could be a signal to revisit clients' fixed-income positioning now, before, say, a December move is priced in more fully. Shorter-duration bonds or floating-rate instruments may warrant a second look for clients sensitive to rate risk. Advisors with clients holding significant cash allocations should also flag that a delayed-but-still-likely hike keeps the reinvestment-rate clock running, making now a reasonable moment to discuss laddering strategies.