The best way to understand the decision of the Federal Open Market Committee (FOMC) of the Federal Reserve to increase the target interest rate by one-quarter of one percent is in the context of restrictive versus accommodative monetary policy. With the US economy growing in solid fashion—job gains, productivity growth, and capital spending were all specifically cited in the very (VERY) short press release—FOMC members appear to have concluded that monetary policy was not restrictive and was possibly expansionary, facilitating upward pressure on prices. Federal Reserve Chairman Kevin Warsh had signaled this view of monetary policy in his remarks at the Jackson Hole Economic Symposium at the end of August. Despite recent comments by other members of the FOMC indicating that they might be open to holding rates steady, the decision to raise the target interest rate to 3.75%-4.0% was notably unanimous.
It is highly significant that the new Chairman has led the FOMC to a policy action that was virtually demanded by global bond markets but counter to the wishes of the White House, though possibly not to the somewhat silent Secretary of the Treasury, who must deal with bond markets on a regular basis to refinance the growing debt of the United States. There were immediate questions, and there will be much ongoing debate, about the delicate choreography between the White House, the Treasury Department and the Federal Reserve. With some 48 days remaining until midterm elections (and voting starting much before November 3), the Chairman of the Federal Reserve highlighted the persistence of inflation, tightened policy in a way that will put further upward pressure on mortgage rates, and called out the impact of inflation on the “least well-off” approximate 50% of the population, which he defined as “people who don’t own financial assets . . . who live off their paycheck alone.”
Accompanying the interest rate decision was the regularly scheduled Summary of Economic Projections (SEP). The SEP revealed a Board more positive about economic growth and employment than in the last SEP in June, though somewhat more pessimistic about inflation. Collectively, the FOMC Board appears to be leaning into another interest rate increase in 2026. Nevertheless, Chairman Warsh continues to decline personal participation in the SEP, aka the “Dot Plots”, and made clear that he does not consider the SEP signaling of another interest rate hike this year to be forward guidance worth acknowledging.
Several important lessons should be taken from the Federal Reserve press conference with Chairman Warsh following the FOMC interest rate announcement. The most important of these is that Chairman Warsh is fully committed to his demand for discipline and brevity in the explanation of Federal Reserve monetary policy, but he also is willing to amend his style in the interest of improving communication with financial markets. The press conference was substantially different in tone and content than the previous press conferences, which were not well received by market participants. Much as was the case with his Jackson Hole speech, Chairman Warsh is likely to receive plaudits from many quarters for his command of the press corps and his clarity of thought. The most interesting of the lessons, however, is that Chairman Warsh, unlike former Chairman Powell, is most definitely an economist and will guide the Federal Reserve with deep knowledge of economic theory relating to the setting of monetary policy. Nowhere was this more apparent than in his discussion of data points (being “data driven”, as Jerome Powell used to say) versus trends: “data points are noisy . . . trends matter.” The core explanation for what changed between the July meeting and the September meeting was that there was no discernible trend towards lower inflation, not that there was any one data point that changed perceptions. The problem with former Chairman Jerome Powell’s data-driven language was always that this placed the Fed in the position of looking backwards, not forwards, to set policy. Chairman Warsh has clearly established a return to more traditional policy making.
Chairman Warsh carefully characterized the interest rate increase as “removing a dose of accommodation”, not an attempt to slow the US economy down. The fundamental causes of current inflation are tariffs, energy prices and geopolitical developments. Yet, monetary policy may be accommodating the spread of those price shocks into other, less directly impacted sectors. In the parlance of economics, this positioning is not particularly “hawkish”, yet financial market participants are likely to describe it as such. More to the point, the yield on the 10-year Treasury, described by Chairman Warsh as “the most important asset in the world”, reversed course and rose slightly after the conclusion of Chairman Warsh’s presser. The SEP may not be held in high regard by the Chairman, but bond markets are taking note, anticipating inflation pressures will get somewhat worse before they get better, and the Federal Reserve will need to respond.