A few hours ago, the Federal Reserve's FOMC unanimously decided to raise interest rates by 25 basis points, lifting the target range for the federal funds rate to 3.75%–4%, the first rate hike since July 2023. The latest dot plot shows that 16 officials expect at least one more rate hike in 2026, with the median rate projections for both 2027 and 2026 at 4.1%. Markets fluctuated accordingly, and Bitcoin appears to have seen the bad news priced in, continuing its recent path as a strong asset.
BlockBeats has compiled Warsh's press conference after the rate hike announcement, to see how he thinks about the issues the market cares about most.
A 25 basis point rate hike won't reopen the Strait of Hormuz, so I want to know: when these modest rate hikes cannot solve the energy supply-side problems in inflation, how much effect do you think they can have?
Warsh: We cannot influence any single price, whether it's oil prices or food prices in the supermarket. But what we can do, and certainly will do, is: ensure that any changes in relative prices do not spread, do not create second-round and third-round effects in the economy. That is precisely the task given to us, and we will accomplish it.
When the Fed starts raising rates, it usually follows with a series of hikes. In your assessment of economic conditions today, is there anything different that suggests this typical pattern does not apply this time? Also, if it's mainly supply shocks driving inflation higher, what effect do you expect rate hikes to have in the current situation?
Warsh: I don't do forward guidance. Our decision today is a prudent decision, a serious decision, a responsible decision, one that I have been preparing for and thinking about throughout my one hundred and ten-plus days in office. You have already heard from the dot plot what others' projections are. I will not prejudge any future decisions. You may have heard me say at Jackson Hole: what I commit to is a set of discipline, a set of principles; what I commit to is looking out the window and seeing clearly what I can observe. I did that at Jackson Hole, and we are doing that today.
The market priced in a 90% probability of a rate hike today. You don't want the Fed to be led by the market, so does this count as a rate hike led by the market? Also, bond yields are rising, and that's one of the indicators too. Is debt part of the reason?
Warsh: I've said this before, and I'll say it again. The Fed has enormous power, and these are decisions we make. But making the mutual understanding between financial markets and the Fed better is a balance I have long believed could be improved. We made this decision today based on our assessment of the situation, based on our assessment of employment trends, based on our judgment of the economy's strength. Sometimes the market tries to anticipate our outcome. I will observe market prices and see what they say, but today was our own decision.
What exactly does today's move mean for American consumers? And I have to ask, what message do you want to send to President Trump, who has repeatedly called for rate cuts rather than hikes?
Warsh: On discussions with the president, I have nothing for you, but I won't count that as your question. On the American people, as I said in my opening statement: those who are least well-off benefit most from stable prices. The decision we made today is the right decision to fulfill the price stability mandate Congress has given us. Moreover, I would say, precisely because of the underlying strength of the economy, precisely because we are, as noted, operating broadly near full employment, we are in a position to focus on price stability. A few months ago I said we would achieve price stability; today's action is consistent with that statement.
Compared with the July meeting, what exactly has changed? You mentioned then that the Fed had been holding steady until today. Also, do data such as today's retail sales report suggest demand is heating up and could push prices higher?
Warsh: As you may know, I am not a data-point-dependent person, so I will not react one way or another to the data delivered to the door. But on your first question, I think that is the more important question: what has happened in the past seven weeks. First, I would say that seven weeks ago most of my colleagues thought these seven weeks were a worthwhile investment, buying time to allow us to make a sound decision. I would highlight three things that happened in the intermeeting period.
First, seven weeks ago I may already have had a judgment about the strength of the economy; during this period a fairly broad range of data emerged, including labor market data, showing the economy has strengthened. You may have heard me say this at Jackson Hole a few weeks ago. This is the judgment of both me and the Committee.
Second, the inflation trend. I said at Jackson Hole that the trend is what matters; I said we should look out the window and examine reality. A few weeks ago my judgment was that this summer's inflation trend did not pass the test. Since then I have seen almost no information that would make me overturn that judgment, so I held to it.
Third, what changed in seven weeks is geopolitics. These hotspots in the world cannot be hidden, and our judgment about the most likely and least likely directions of the geopolitical situation has changed. These three things together point to today's firm and unanimous decision.
You said today's decision in your view removed some accommodation. If you would, please also talk about the views of others at the meeting. Would you describe the current level of rates as "restrictive"?
Warsh: I have said before that I find it difficult to describe financial conditions as restrictive. I think what I said was "I find it hard to say that." What I heard at the meeting over the past two days is that my colleagues also find it hard to describe it that way. We removed some accommodation in order to bring financial and credit conditions more in line with our ultimate goals. That is today's decision, that is our judgment, and we will continue to assess it prospectively.
Previously, most Fed officials described rates as "modestly restrictive"; if you're pulling back accommodation, can you say where you see the federal funds rate relative to the neutral rate? And if you don't mind, some details: do you have a shorter-run neutral rate and a longer-run neutral rate in mind? Is that how you think about it?
Warsh: Two words: No. In a few more words, I'd say this: As an academic matter, I've always been interested in the neutral rate. When I studied economics, we called it the Wicksellian rate, a real equilibrium rate. It's academically useful, a kind of parlor game that helps us think about policy. But I don't think it has any operational bearing on the decisions we make today. No.
You've talked about your dislike of data dependence, and again today; but heading into this meeting, the market was intensely focused on the August CPI. I want to ask: do you think the market was right to do so? Or, is there anything you've learned about how to communicate going forward?
Warsh: For the past decade or so, there's been a general habit of waiting breathlessly for a single data point. That's not my view. I'm not holding my breath for any particular data, whether it's this morning's retail sales or last week's CPI. I'll just reiterate: the trend is what matters, data points are noisy, and relying on data points is a dangerous mental occupation. That's not something I worry about. Over time, the market will come to understand how this Fed makes decisions, what's relevant, what's not; beyond that, I don't want to comment on their behalf.
A few weeks ago, the President sent a message basically threatening to cut off trade with certain countries if they didn't cut rates. And here, obviously, the decision was unanimous to do the opposite. What would you say to investors who see this as another test of Fed independence? And, when was the last time you spoke with the President? Do you expect a meeting after this?
Warsh: On discussions with the President, I have nothing to say; and I'm not a Wall Street ticker. Part of Fed independence is staying in our lane. Independence is a two-way street. We also let the people doing trade policy and fiscal policy stay in their lanes. That's precisely why we can stand here and say what we see.
I'd like you to explain: who are the least well-off? When these people may be squeezed by higher mortgage rates, higher oil prices, higher food prices, and now broadly higher interest rates, how does raising rates help them?
Warsh: That's a fair question. In macroeconomics, we're used to looking at aggregates here: total GDP, overall labor market trends, the inflation picture. There are many people in Washington who spend a lot of time studying distributional consequences, and that's their job and their expertise. The least well-off, as I describe them, are often people who don't own financial assets, probably less than half the country's population. They don't have home equity, they don't have assets in a 401(k) account, and they live paycheck to paycheck, every two weeks.
Within our mandate, there are two things we can do: ask ourselves whether the country is near full employment or not. We have done that. It doesn't mean no one is looking for work, but overall, we are operating roughly near full employment. If that is the case, we can look at the other side of our mandate and focus on price stability. Inflation running at a level consistent with our 2% target is a good thing, because only then, when they get their paychecks, can they breathe a sigh of relief and achieve growth in real take-home income. The responsibility for this is not entirely ours, but the responsibility for price stability is ours. As I have said before, inflation is a choice; today we took a step toward delivering on it.
Do you look at what other central banks are doing? What do you make of the European Central Bank's moves? They hiked twice this year, but not consecutively.
Warsh: I won't ask them to anticipate the decisions we are going to make, so I won't anticipate the decisions they are going to make either. But I will say this: over the past few weeks, I have not only spoken with foreign central bank counterparts, as I mentioned, at Jackson Hole, at the G20 meeting we hosted in North Carolina, and at a central bank conference in Basel. What I heard around the table is that most advanced economies are also under price pressure. They are making their own choices in line with their own mandates.
That tells me two things: first, when the Fed makes policy choices, they are not only about the U.S. economy; they also spill over to the rest of the world, and vice versa, though to a lesser extent. When foreign central banks face higher prices and choose to raise rates in line with their mandates, they are helping to push down inflation in their own countries, and spillovers and spillbacks go both ways. Beyond that, I won't comment on what other central banks may do this week or later.
Last fall you worried that the Fed was about to make, quoting you, a "sixth or seventh big mistake," because it concluded the economy was too strong to support rate cuts. Yet today you raised rates. Can you talk about what has changed in your assessment of the U.S. economy from then to now?
Warsh: I can't recall the full context, Nick, but I can tell you about the growth situation now. When I arrived more than 110 days ago, my suspicion was that the U.S. economy was strengthening. Even over the past few weeks, I think we now have broad-based data showing that the economy has indeed strengthened. Underlying growth is higher, inflation is the problem, and the price stability problem has existed for more than five and a half years. So the Committee decided today to act to ensure a more timely return to our price stability objective. Price stability is the foundation of economic growth; I think we took an important step today toward delivering on it, in part by withdrawing the dose of accommodation I mentioned earlier.
Long-term bond yields have risen quite a bit over the past few months, especially in recent weeks. What do you think the bond market is telling you, particularly about the growth outlook and the neutral rate? What does that mean for monetary policy?
Warsh: Okay, let me walk through how this came together. Bond market prices signal the outlook, and I want them to tell whatever story they want to tell, and I want to examine it. But why are yields rising, say, from the last FOMC meeting to now? I'll give you three reasons, though I should say these things are often determined by multiple factors at once. The factors affecting the world's most important asset, the 10-year U.S. Treasury, are complex. It is the risk-free asset, and virtually every asset in the world is priced in relation to it.
So I'll make three points: First, the economy is strengthening. I think part of the reason long-term yields have risen since 2026 is that the economy has strengthened. Second, the scramble for capital. I mentioned in my opening remarks the surge in capital expenditure, and that's real; the so-called hyperscale data center operators are raising large amounts of money in the markets. The scramble for capital is real, and I think that explains some of the rise in yields. Third, geopolitics. Hot spots around the world are pushing long-term yields higher. This isn't just about spot prices for energy or corn, soybeans, wheat; it's also about the difference between spot prices and so-called crack spreads, what that means, and how it passes through to goods in stores across the country. I think those three points are the main explanations, but certainly not all of them.
You said at Jackson Hole that you want to see inflation come down clearly and fast enough, and that standard has no quantifiable threshold. I ask because today you said today's policy action will support inflation returning to the 2% target in a more timely manner; but in the economic projections, the median pushed the time to reach the 2% target to 2029, two more years later. I want to know, how do you align those two things?
Warsh: There's a simple way to align them: those are not my projections. Those are the projections of my 18 colleagues, and I'm just doing my best to relay them to you faithfully. My job is not to do forward guidance; and my commitment in June was to reaffirm to the American people, and to everyone listening, that we will deliver price stability. My commitment in July was to say we want to buy a little more time, and to assess what is happening across multiple dimensions. What I said at Jackson Hole in August was: what we are committing to is a discipline, not a particular decision. Today's action begins to show that we are serious about this, and that we will deliver on the price stability objective. As the statement says, we will do it in a more timely manner. This is our decision; we will have more to say in the discussions over the coming weeks and months. But it is not appropriate for me to prejudge future actions.
You have talked in the past about the potential benefits of widespread AI adoption. How concerned are you about the increasingly unsettling warnings we hear from AI leaders about losing control of this powerful technology and causing real-world harm, harm that presumably would hit the real economy?
Warsh: I have spent a lot of time thinking about artificial intelligence; before I took this position, I also spent a great deal of time speaking about it publicly. The independence of the Federal Reserve means each entity sticks to its own lane. We care very much about what is happening with artificial intelligence, very much about its impact on the demand side of the economy and, ultimately, on the supply side as well. I care to such a degree that I believe it is so important that we should establish a task force to submit a report by the end of this year to help us think through its implications for our future policy situation. But policy decisions regarding risks and rewards, challenges and opportunities, are made by other parts of the government. Those political decisions, those policy decisions, I leave to them. The consequences of those decisions clearly have implications for our own work, and that is where we will focus.
The rise in inflation mainly comes from energy price increases and tariffs. Some say these are supply shocks that rate hikes cannot solve and that they will fade on their own as long as inflation expectations remain anchored. And since you have already raised rates, do you need to push growth below potential, thereby inadvertently bringing weakness to the job market, in order to bring inflation down? Given that artificial intelligence is such a strong driving force for the economy, how will these dynamics evolve?
Warsh: There is a lot in that. Let me see if I can address just one point. First, we believe the unemployment rate is broadly consistent with full employment. I do not think we need to harm the labor market to achieve our goals. Nor do I believe that the two parts of our mandate, price stability and full employment, are in conflict with each other over the medium term. Ensuring continuous, sustainable, durable economic growth—that is our business. What we are doing today, and will continue to do, is ensure price stability; that can mean sustainable, durable economic growth can last longer, the economy can be stronger, and, as I said earlier, those who are least well-off can benefit from it as well.
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