The Economy — Digest
TL;DR
The two open questions from last cycle both got answers on September 16: the Fed hiked 25bp to 3.75%–4.00% — unanimous, hawkish, and over Trump's explicit objections — and August retail sales blew through forecasts at +1.2%, confirming consumers are still spending through the diesel shock. The tension now is that the same strength justifying the hike is being financed by savings drawdown, not income.
The Fed hiked — unanimously — and the dot plot says this is a cycle, not a statement
The September 16 decision resolved last cycle's "hold case isn't dead" question decisively: the FOMC voted 12–0 to raise rates to 3.75%–4.00%, the first hike since July 2023 and Kevin Warsh's first move as chair — in the opposite direction of what Trump appointed him to deliver (fed-policy-pivot-kevin-warsh-rate-hike-chatter).
The statement was pointedly hawkish, and notably dropped its prior "supply shocks" framing for inflation:
"Inflation remains elevated. Today's policy action will support a timelier return to the Committee's 2 percent goal. The Committee will deliver price stability." — FOMC statement, Sept 16, 2026
Warsh anchored the decision to his Jackson Hole standard — "The plain fact is that inflation is too high, and has been for too long" — and swatted away Trump's demands with "we stay in our lane. Independence is a two-way street" (The Guardian live blog). Trump's Truth Social reply: "LOWER THE INTEREST RATES FOR THE UNITED STATES OF AMERICA, AND FAST!"
The important shift from last cycle's digest: the dissenters (Zandi, Posen, Mester) didn't dissent in the room, and the debate moved from whether to how many. Sixteen of 18 policymakers see at least one more 25bp hike by end-2026, with the median projecting 4.00%–4.25% held through 2027 — and 2% inflation now not expected until 2029, a year later than June's projection (Reuters). Seema Shah's read captures the dove capitulation: "The unanimous vote shows that rising energy prices and stubborn inflation have brought even the doves on board, making a one-and-done move highly unlikely."
What to watch: the late-October FOMC meeting, and whether Capital Economics' call for a second hike this year and a third in early 2027 holds under Warsh's no-forward-guidance regime.
Retail sales: the consumer is still running the economy — on borrowed fuel
Hours before the Fed's decision, August retail sales delivered the strongest possible justification for it: +1.2% m/m against a +0.8% consensus, with the GDP-relevant control group up 1.4% — the best since September 2024 and triple the forecast (us-consumer-spending-retail-sales-gdp-growth-outlook). The gains were broad-based, from nonstore retailers (+2.6%) to restaurants (+1.2%), and it forced immediate GDP upgrades: Goldman Sachs to 3.0% annualized for Q3 and JPMorgan to 3.5%, against Q2's 1.5% pace.
But the strain beneath the headline is exactly what last cycle's digest flagged in the household-squeeze theme:
"More consumers are losing their purchasing power... We expect this to be an increasing drag on real consumer spending growth in the fourth quarter and into 2027. Healthy retail sales reports like this one are more dependent than ever on continued household wealth gains." — Scott Anderson, BMO Capital Markets, via Reuters
Consumers are "saving less and tapping into their nest eggs," with spending supported by stock-market gains while inflation-adjusted wages fall. The saving-ratio watch (last at 2.6%, threshold 2.0%) is the tripwire: a strong Q3 financed by balance-sheet depletion sets up the sharper Q4 slowdown the Fed's own tightening will compound. The same morning's import-price print — +7.0% y/y, the largest since August 2022, with imported semiconductors up 19.1% — is the tariff-and-AI inflation feed that made the unanimous hike a foregone conclusion.
What to watch: the personal saving ratio — a break below 2.0% would confirm the Q3 strength is a last burst, not a trend.
What surprised us
- The unanimity. Last cycle we flagged a "reluctant chair dragged along by a committee majority" scenario; instead the vote was 12–0 and the statement removed the supply-shock caveat — signaling the committee now sees inflation as too broad for that excuse (fed-policy-pivot
).
- The curve flattened on a hike. The 2-year rose to 4.725% (a two-year high) while the 10-year barely moved at 5.00% — Reuters read the flattening as "an initial vote of confidence" that the Fed is serious about price stability. The bond-vigilante pressure on Bessent may be easing just as the Fed turns hawkish.
- Retail strength and rate hikes arrived the same day, and the second justified the first. The Fed is tightening into a consumer spending at a 6% annual pace — which only works if you believe, as the Fed apparently does, that the strength is the problem.
- The political clock is brutal. A hike under a president who demanded cuts, less than two months before midterms, with gasoline up roughly a third year-over-year — Warsh's independence messaging is now a live election issue, not an abstraction.
Open threads worth a vote
- FOMC decisions after September 2026 — the resolved September question becomes a forward one: does the December second-hike call survive the Q4 consumer slowdown?