The setup is a 2026 Fed still at 4%, with hot CPI/PPI keeping a December hike alive even as markets price October hold odds in the 80s and only about a 16% chance of a hike. The core thesis is that 2018 offers a useful template: the Fed paused around midterms, then tightened again in December as the 2-year yield compressed toward policy, and a similar 2026 sequence could repeat. But the path is not locked in: if the long end rises enough to hit growth, hikes may fade entirely, and after one more move in December the rate path should become far less deterministic into 2027.
Fed policy rates are at 4%, with another hike expected before year-end.
CPI and PPI both came in hot, yet market-implied odds still price an October hold at about the 80s-something% range and only about a 16% chance of a hike.
In 2018, the Fed hiked to a 2 to 2.25% target range at the September meeting, held steady at the November meeting after the midterms, then hiked again in December to 2.5%.
The December 2018 SEP showed 2.4% for 2018 and 2.9% for 2019, but the Fed did not deliver the projected 2019 hikes and was already cutting by July or September 2019.
The 2-year yield is treated as the key reference: when it rises, the Fed tends to chase it; when it falls back toward the policy rate, policy turns restrictive and further hikes become unnecessary.
The 2-year yield was described as having just hit 4.9% and now sitting at 4.76%, above the 4% Fed funds rate.
At the end of 2018, the 2-year yield was around 2.9%, and the Fed funds rate only needed to move toward it once the yield converged lower.
In the 2026 vs. 2018 overlay, the 2-year yield topped on November 8, 2018, alongside the November 7-8 FOMC meeting where the Fed held rates steady.
The proposed 2026 path is: the 2-year yield spikes into the midterms, the Fed skips that meeting, the long end gets spooked and spikes, then yields fall after the election.
If yields fall in December, the Fed could hike once more so the policy rate moves near the 2-year yield and closer to a neutral-rate approximation, reducing needed tightening in 2027.
The transcript calls the 2018-style setup a compelling narrative but warns history does not always repeat, especially if higher long-end yields trigger business stress and growth scares.
The stated base case is no October hike, yields moving up into the midterms, then falling after them, with a December hike still possible.
The rhythm from September to October to November to December in 2018 is framed as something that could repeat eight years later in 2026.
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