The Federal Reserve (Fed) delivered on consensus expectations by raising its policy rate by 0.25% last week. The accompanying statement explained the move as an action to “support a timelier return to the Committee’s 2% goal.”
Several investment professionals questioned the Fed’s policy move. A range of inflation measures suggest that inflation is moderating back to target, though slowly. The stickier inflation components are associated with higher energy prices, either directly or indirectly via energy-heavy industries such as airfare, car rentals, or similar. Core inflation (ex-energy & food) has remained mostly benign. Hence, those arguing to leave rates alone had some backing.
The outlook for energy is unusually uncertain as geopolitical tensions continue to keep energy prices elevated and volatile. However, unless energy prices materially increase, headline inflation is likely to be much closer to target by next spring as the initial energy price shock at the outset of the Iran conflict begins to drop from the year-over-year calculation, often referred to as the “base-effect.” Going forward, this may alleviate some pressure on the Fed.
Other broad inflationary pressures have decelerated. Slowing wage growth and high productivity have constrained labor’s inflationary influence. Additionally, higher-paid employees are disproportionately leaving full-time employment, replaced by lower-cost youngsters.
During the post-announcement press conference, Chairman Warsh described the move as removing a dose of monetary accommodation as opposed to applying a monetary restriction. In other words, letting up on the gas as opposed to applying the brake. Warsh also suggested another rate hike is likely in the coming months. (Forward guidance was previously eschewed by Warsh, yet here he is offering forward guidance?!?) Either way, raising interest rates will be interpreted as slowing the economy via demand destruction.
Warsh acknowledged the economy has accelerated throughout 2026, maybe giving him leeway to raise rates with minimal economic damage. With that in mind, inflation has made progress but remains above the Fed’s 2% target, the Fed’s definition of price stability. The Fed no longer appears comfortable with the slow progress towards 2.0% inflation and thinks a proactive nudge may help.
The Fed’s next meeting is set for October 27-28, about a week prior to the mid-term elections. We anticipate Warsh will hold off further hikes until after the midterms. Yet, we have come to find during his short tenure that Warsh may not be as predictable as former Fed Chairpersons.
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