AFS Markets Blog: Morning 17/09/2026

• Meanwhile in markets, that was a hawkish Fed hike if there ever was one, with Fed Chairman Warsh teeing up a string of rate hikes. And by flagging strong – too strong – bank lending growth rates, Warsh hit all the right notes for those who harbor monetarist inclinations. Which includes yours truly;

• The key takeaway from the September FOMC is that the Fed doesn’t see financial conditions as restrictive. On the contrary, Warsh said that robust bank lending growth (exceeding an annual rate of seven percent), tight credit spreads, and buoyant financial markets in general suggest that financial conditions are accommodative. Yesterday’s quarter point hike was designed to remove that accommodation. Inevitably, more rate hikes must follow;

• Warsh’s reasoning on financial conditions being easy runs counter to the FOMC’s own estimates that monetary policy must be mildly restrictive. The fed funds rate is at 3.63 percent (before yesterday’s hike that is), which is significantly above the FOMC estimate of the nominal neutral rate of about three percent. By emphasizing what he’s actually seeing in the economic data, Warsh drove a stake through the neutral rate – a highly academic concept – being the yardstick for monetary policy. Milton Friedman would be proud of what Warsh did here (and for the record: President Trump wasn’t angry at Warsh when he responded to the news of the hike);

• I think Warsh is right in describing financial conditions as comparatively easy. Obviously, given the AI-driven burst in credit and bank lending. But, as the history of investment booms shows, such booms are bullet-proof to higher (real) rates until they aren’t. What I am trying to say here is that the Fed gently tightening might not really slow down the boom. It could very well be the case that Warsh & Co must slam the brakes to slow down the buoyant sectors of the economy. That runs counter to what Warsh’s plan for a mid-cycle adjustment. In this regard, notice how he said that he sees no trade-off between employment and price stability (central banker code for tightening without breaking eggs);

• Markets now price in an October hike as a coin toss between a hold and another quarter point hike. I think that’s priced to perfection. The outcome of the of the October FOMC is contingent on incoming inflation data and bank lending figures. Regarding the former, we get one more CPI report and two more PCE inflation reports before that meeting (including the PCE revisions). But it’s the bank lending data, which the Fed releases weekly with a two-week lag, where we can catch the first glimpse of Fed tightening having measurably effects;

• Turning to come market commentary, US Treasury yields across the curve have basically erased yesterday’s FOMC-meeting induced increases. The move lower in UST yields can be attributed to energy futures prices sagging this morning. As a matter of fact, Brent at $103.5 represents a five percent loss from Tuesday’s high. Oil prices – and Dutch natural gas futures prices too – are falling on reports that Saudi Arabia will restore half the capacity of the crucial east-west pipeline in days;

• USD OIS forwards still price in about 100bps of Fed hikes, including yesterday’s move. The broad dollar is higher, though with Treasury yields sagging the greenback has given up some of its gains;

• With the Fed flagging a mid-cycle rate hike cycle, Japanese officials’ job of strengthening the yen got harder still. USDJPY is loitering in the mid-155s and has therefore erased about half of the intervention gains. At tomorrow’s Bank of Japan meeting, to prevent renewed yen weakness officials must signal that tomorrow’s inevitable hike isn’t a ‘one-and-done.’

• S&P 500 futures have erased most of the Fed-induced losses. Asian equities are a mixed bag, with Chinese markets down moderately while the rest of the region is up modestly;

• Looking ahead, eyes will on the Bank of England meeting at 13:00 CET followed by the Czech National bank an hour and a half later. Both central banks are expected to hold rates, though the former could start to lean towards hiking on fears that higher energy-driven headline inflation will drive up core, which is tracking at 2.6%;

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