The Fed Hiked After All — A Tightening the Economy Forced

Contents

1. What the episode covers
2. Key points
3. Going further
4. The chip index rose on hike day — what did I miss?
5. I followed the data and still got it wrong — is my method broken?
6. The same hike — when should it worry me?
7. Worth a look
8. One thing to take with you

The sage treats what is not yet ill, and governs what is not yet in disorder.

—— Huangdi Neijing, Suwen, “Regulating the Spirit Through the Four Seasons” (pre-Qin to Western Han; translation mine)

What the episode covers

MacroMicro’s After Meeting EP 214, published 20 September 2026. Host Roger sits down with US researchers Ryan and Ralice the morning the FOMC wrapped up. The Fed raised rates by a quarter point, its first hike in three years, on a 12-0 vote. The question on the table: one more before year end?

What stayed with me wasn’t the decision. It was the long stretch where both researchers said, in public, “I got this wrong, and here is the exact step where I got it wrong.”

Key points

The 12-0 vote is itself a message. Ryan said their pre-meeting draft already reasoned this through: if the Fed was going to turn, the vote would come in near-unanimous. A central bank pivoting here cannot let the market see hesitation, because what it is managing is inflation expectations, and visible hesitation discounts the policy. The vote count is part of the decision, not a byproduct of it.

One new sentence in the statement overturned the prior communication. The earlier signal was that monthly prints of 0.2% or 0.3% drifting toward 2% would justify standing still. This statement writes in that the current tightening adjustment helps inflation return to 2% faster. Warsh noted in the presser that inflation has run above target for over five years, and with growth and employment holding up, accelerating is worth doing.

Both researchers were wrong, and both located the error. Ryan said he would make the same call again on the data, then explained the gap: Warsh rejects forward guidance but preserves forward action. The Fed can move ahead of the data on its own reaction function — the Greenspan playbook. Chinese uses one word for both; conflating them produces the wrong conclusion. Ralice’s error sat elsewhere. She read the full Jackson Hole text, found most of it restated June and July remarks, and placed Warsh on the Waller side of the committee spectrum, which pointed to no hike.

Oil broke the judgement. An attack on a Saudi east-west pipeline sent Brent and WTI back above $100. Ryan flagged that the number to watch is US retail gasoline, not just crude — September’s monthly gain jumped, diesel too. That figure only becomes a CPI print in mid-October. The Fed moved on something visible but unpublished. Waller had already stated his reaction function plainly: a hot CPI makes a September hike appropriate. PPI and CPI both came in a touch hot.

The dot plot misleads unless read with the SEP. Alone, the dots look alarmingly hawkish. Paired with the projections, a different picture appears: 2026 and 2027 GDP each revised up a tenth, four years running above the 2% long-run average; unemployment held at 4.1%, below the 4.2% long-run rate. Warsh called this full employment. Growth above trend, unemployment below trend, inflation above target — with all three, tightening does not force a trade-off between the dual mandate. Ryan’s phrase: a hike the economy forced. The 2028 and 2029 dots stay inverted, so the long path back toward neutral is intact. (A side note from the show: some dots are missing. Beyond Warsh, who never submits, one member left 2028 and 2029 blank, and nobody knows who.)

The bond market said more than equities. On the day, the Nasdaq was flat, the SOX rose, the Dow fell hardest. Ryan reads the hike as already traded during the run-up, when the Nasdaq lagged and the Dow and S&P chopped sideways. What interests him more is the curve flattening after a long bear steepening: twos and tens jumped, twenties and thirties lagged. Pulling the long end down makes borrowing short to fund long easier — the 30-year sits at 5.3% while Google pays 6% on corporate paper. His everyday version: before the pandemic you would hesitate at a 2% personal loan; after several good years you will take 3% and put it to work. Willingness to carry a higher rate comes from the environment.

The Fed and the market have swapped roles. Under Powell, the Fed pointed and FedWatch priced toward the point. Warsh gives a reaction function without the thresholds, lets the market price, and reveals the decision on the day. Ryan named the practical cost: a 0.3% or 0.4% print next month is unambiguous, but when the month after that returns to 0.2%, there is no stated line to hold on to.

Going further

The chip index rose on hike day — what did I miss?

This scene recurs: bad news lands, the price goes up. The first instinct is that the market has lost its mind, or that a bullish item slipped past you.

The workable explanation is timing. Price reflects the change in expectations, not the quality of the event. Hike odds climbed from Jackson Hole on 28 August and reached ninety percent before the meeting; through that stretch the Nasdaq underperformed while the Dow and S&P went sideways. The decline happened while the expectation formed. By announcement day the change was near zero, and what remained was uncertainty clearing.

The usable version: when price and headline point opposite ways, go find out when that news started being expected. If you can trace it, you know which hand of information you are holding. If you cannot, you have not mapped how expectations form on this line yet, and a call made there is a bet.

I followed the data and still got it wrong — is my method broken?

This is the part of the episode worth keeping. Both researchers missed the direction, and neither post-mortem ended at “I’ll be more careful.”

Ryan’s error resolves to something specific: he read Warsh’s rejection of forward guidance as meaning the Fed would wait for the data to complete. Warsh kept forward action — no signposting of direction, but freedom to move on his own read of the next three months. Two ideas sharing one word, and the conflation produced the wrong output. Ralice’s error sits somewhere else entirely: she placed Warsh on the wait-and-see side of the committee, and then an exogenous variable, oil, pushed the whole row of members the same way.

One wrong conclusion, two different causes underneath, two different repairs. One is a concept that needed separating; the other is an exogenous variable that was underweighted. A post-mortem that stops at “I was wrong” sees neither layer.

The way I do this is to write the judgement out as a handful of conditions, then circle afterward which one moved. The hard part is spending those five minutes at the time, because a version reconstructed from memory later bends toward flattering me.

The same hike — when should it worry me?

The show draws a distinction I find more useful than any level forecast: a hike forced by inflation running away means something opposite to a hike taken because growth is strong.

The first trades demand for inflation, and the cost is an economy knocked down and a market left without support. The second is what that set of projections describes — growth above trend, unemployment below trend, inflation above target — where the sliver of growth tightening removes does not break anything. Asked by a Yahoo reporter whether the Fed needs sub-potential growth and a weaker labour market to bring prices down, Warsh said no, then added that he is doing this for wage earners who take a paycheck every two weeks to the shops, where inflation bites harder than it does on holders of stocks and houses.

To place yourself, look at where the data stood on the day of the hike, not at how many quarter points were delivered. The judgement has a stated failure condition too: Ralice put the whole frame on oil falling back to an $80–90 band, and Ryan’s joke that “$190 really would change the view” makes the same point. Past some magnitude, an exogenous variable rewrites the frame instead of adjusting it.

Worth a look

• FedWatch (CME): hike and cut probabilities implied by fed funds futures, moving in real time. It carries more weight now that Warsh leaves pricing to the market.
• Dot plot and SEP: quarterly, in March, June, September and December. Read the median dot and how tightly the dots cluster, then read GDP, unemployment and inflation projections alongside — the pair tells you where the stance came from.
• Meeting minutes: about three weeks after, with discussion the statement and presser left out.
• Job openings divided by unemployed: near 1 signals a balanced labour market; the show cites roughly 1.05.
• Cleveland Fed inflation nowcast: direction ahead of the official PCE release.
• The episode: MacroMicro After Meeting EP 214, 20 September 2026.

One thing to take with you

After a bad call, separate a wrong conclusion from a wrong frame.

A wrong conclusion just needs a different answer next time. A wrong frame — two concepts sharing a word, or an exogenous variable given too little weight — will keep producing errors through the same method, and each one will feel like bad luck.

Here is something I’ve tried. Pick a recent misread, and it need not involve markets: “I thought he wouldn’t be upset,” “I thought that meeting would run half an hour,” “I thought she’d be in a good mood that day.” Write down the three conditions your expectation rested on, then circle the one that moved. Then ask: was that one visible as movable at the time? If it was, you missed it. If it wasn’t, this kind of call simply carries that much uncertainty, and what needs adjusting is how much confidence you put behind it.

Raw Markdown

This article is an educational discussion of investment method. It is not advice to buy or sell any individual security, offers no target prices, and does not analyze any current holding. Investing carries risk; make your own decisions or consult a qualified professional.