Warsh Fed lifts rates a quarter point, first hike since 2023

The Federal Open Market Committee on 16 September raised its target range for the federal funds rate by a quarter of a percentage point, to 3.75 percent to 4 percent. The vote was unanimous. It is the first increase since July 2023 and the first policy move of Kevin Warsh's chairmanship.

Warsh, nominated by President Donald Trump and in the chair since May, told reporters that three things had changed since the July meeting: the economy had strengthened, inflation had not slowed, and geopolitical tension had intensified. "The plain fact is that inflation is too high and has been for too long," he said. "We must be confident that underlying inflation is moving to our objective clearly and at sufficient speed. Today the FOMC decided that this standard has not been satisfied."

He described the quarter-point step as removing a dose of accommodation. In the language the Fed uses, that means officials do not yet see the policy rate as tight enough to bring prices down on the timetable they want.

The dots and the forecasts

In the Summary of Economic Projections, 12 of 18 participants who submitted a path expect one more increase before year-end. Four expect two more. The median official sees rates on hold through 2027 after that extra step. Warsh himself again declined to submit a set of dots, consistent with his campaign against forward guidance.

The committee raised its year-end forecast for the personal consumption expenditures price index to 3.7 percent, up 0.1 point from the previous round. It also nudged the GDP growth forecast to 2.3 percent. Officials still write that inflation falls to 2.3 percent next year, within sight of the 2 percent target. Energy prices tied to the war with Iran are the near-term reason the path has not cooperated.

Michael Gapen at Morgan Stanley revised his own call to three increases this cycle, including Wednesday's, up from two. James Egelhof at BNP Paribas called the two hikes already on the 2026 dots a down payment on a longer tightening cycle. The two-year Treasury yield rose to a two-year high after the statement.

Trump wanted a cut

The president has spent months pressing the Fed to lower borrowing costs. Warsh is his appointee. The committee still hiked, and it did so without a dissent. That fact will travel further than the precise range. Credit-card base rates at large banks began to move the same day. Mortgage and auto quotes will follow with a lag.

In Mumbai the rupee slipped through 96 to the dollar in the session after the decision, the first breach of that mark since 24 July, before finishing around 95.94 on suspected Reserve Bank of India sales. The Sensex closed little changed near 74,315. Foreign institutional investors had already sold more than Rs 2,000 crore of Indian equities the previous session.

Warsh has been impatient with inflation since Jackson Hole. Cooler readings in June and July did not impress him. Wednesday's decision converts that impatience into a rate. The next meetings in October and December will show whether the extra hike already written into the median path arrives on schedule, or whether oil and the Iran war force the four officials who want two more steps to pull the rest of the room with them.

For households the immediate arithmetic is simple. A federal funds range just under 4 percent, with another quarter point possible before Christmas, is the opposite of the cheaper credit the White House has been advertising. Warsh's reply is that price stability is the assignment, and that the assignment is late.