FOMC Hikes Funds Rate 25 BP For First Time In 3 Years To 3.75-4.0% Range

– Warsh: Strong Economy, High Inflation Made FOMC ‘Remove Dose of Accommodation’

– Warsh: Rate Hike Should Ensure ‘Timelier Return’ to Fed’s 2% Inflation Target

– Warsh Refuses to ‘Prejudge’ Future FOMC Actions; No ‘Forward Guidance’

– FOMC Participants Project Funds Rate At 4.1% end ‘26; 4.1% end ‘27; 3.9% End ‘28

– PCE Inflation Forecast to Rise; Unemployment to Fall; GDP to Grow Faster.

By Steven K. Beckner

(MaceNews) – With inflation continuing to run well above its 2% target, a unified Federal Reserve policy body made the politically tough decision to raise interest rates modestly for the first time in three years Wednesday, defying President Trump’s oft-stated quest for lower rates.

The Fed’s policymaking Federal Open Market Committee FOMC shifted directions and raised the key federal funds rate by 25 basis points to a target range of 3.75% to 4.0% — nine months after completing a series of rate cuts totaling 175 basis points over a year and a half.

Fed Chair Kevin Warsh said the FOMC decided to “remove a dose of accommodation” to ensure that inflation will return to its 2% target “at sufficient speed.” He said the strength of an economy near “full employment” and the lack of restriction in financial conditions allowed the Fed to act.

The widely anticipated decision was unanimous, in contrast to the split votes of previous meetings. At its last meeting in late July, Warsh said a majority wanted to wait and “buy time” before raising rates but said inflation trends in the intervening weeks had convinced all members the time had come to tighten monetary policy. 

In its policy statement, the FOMC said, “Today’s policy action will support a timelier return to the Committee’s 2% goal,” then added the now familiar pledge that it “will deliver price stability.” Warsh echoed that statement several times in a post-FOMC press conference.

Unlike the years before Warsh became chair, the FOMC did not provide any “forward guidance” on where rates go from here in its succinct statement.

Warsh, who was superintending his third FOMC meeting after succeeding Jerome Powell on May 22, told reporters he does not want to “prejudge” what might be deemed necessary at future meetings. So, he repeated his refusal to give any “forward guidance” about what action might be taken at the FOMC’s remaining two meetings of 2026 in October and December.

He did make clear that, so long as the economy remains “strong” and “resilient” and unemployment low, the Fed’s “predominant focus” will be combating inflation.

Those wanting to know what the FOMC might do can look at the latest “dot plot” of FOMC participants, who projected that rates will continue to rise modestly in coming months, before leveling off not far above the newly authorized level.

Once again, however, Warsh did not contribute to the rate projections or economic forecasts.

The remaining 18 Fed Governors and Federal Reserve Bank FOMC participants, in their revised, quarterly Summary of Economic Projections, anticipated that the funds rate will end this year at a median 4.1% (a range of 4.0% to 4.25%) — up from the 3.8% projected in the last SEP, published on June 17. By the end of 2027, the funds rate is projected to remain at 4.1%, before dipping to 3.9% by the end of 2028, and to 3.6% in 2029.

Funds rate projections for 2026 ranged from 3.9% to 4.4%.

The FOMC’s estimate of the nominal longer run or “neutral” funds rate, including a 2% inflation assumption, was boosted a tenth to 3.2%, continuing the uptrend of recent years.

In the economic forecasts accompanying the rate projections, FOMC participants anticipated worse inflation than in June, along with lower unemployment and faster economic growth.

Wednesday’s rate increase was the first since June 14, 2023, when the FOMC completed a series of hikes that took the funds rate up to a target range of 5% to 5.25% in a belated effort to cool the supposedly “transitory” inflation that had been bred by massive monetary and fiscal stimulus during the Covid era.

Warsh was direct and unapologetic about raising rates, while declining to comment on Trump’s feelings about it, as he answered reporters’ questions.

“Our decision comes at a time when the American economy appears to be strengthening,” he said. “New hiring, private sector earnings, business capital investment, each of these markers has improved in recent months and is pointing in a good direction.”

Noting that “credit flows have been robust, particularly for businesses,” Warsh echoed his Aug. 28 statement at the Kansas City Fed’s Jackson Hole symposium that he “would be hard-pressed to describe broad financial conditions as restrictive.” And he said that view “was widely shared by the Committee.”

Meanwhile, “inflation remains elevated,” he said, echoing the FOMC statement.

“So, we removed a dose of accommodation.”

Warsh suggested the U.S. economy is in no danger of being undermined by the Fed’s modest tightening.

“Consider the geopolitical landscape of shocks and uncertainty, and you begin to appreciate the resilience of the US economy,” he said. “Given that resilience, and the potential for even greater performance, an attitude of optimism is exactly what I heard inside the FOMC these last two days.”

Warsh said “one basic sign of strength is the state of America’s labor markets,” Not only has the unemployment rate stayed at 4.1%, but “both job openings, and weekly hours, have been increasing,” and “Unemployment claims, on a four-week moving average, are running at levels consistent with full employment.”

But while the labor side of the Fed’s dual mandate is “in good shape,” he said “for more than five years inflation has been running above target.”

“So, our predominant focus is on the price stability side of our mandate,” Warsh continued. “The plain fact is that inflation is too high, and has been for too long.”

The Fed chief downplayed the significance of the latest inflation reports, including last Friday’s consumer price index – instead emphasizing the overall trend of inflation.

“This summer’s inflation readings do not tell me that underlying trends have a meaningfully improved,” he said. “Based on the most recent CPI and PPI data, the 12-month change in total PC prices likely was around 3.6% in August. Core PCE and CPI prices running at about 3.2, and 2.4% respectively. To many categories are still posting increases love 3% on both the 6 and 12-month basis.”

Warsh said he has also become more worried about the rise in oil and other commodity prices.

Explaining why the FOMC waited until Sept. 16 to raise rates, Warsh said, “at our July meeting, we all agreed that inflation remained too high, and we expressed our joint readiness to act as circumstances might require. And a good majority of my colleagues and I thought the wiser course then would be to weight new information in the inter-meeting period.”

At Jackson Hole, he recalled, “I expressed my commitment to a monetary policy discipline, not to a decision. I defined the standard for action: ‘We must be confident that underlying inflation is moving to our objective, clearly and at sufficient speed.’”

“Today,” Warsh added, “the FOMC decide that this standard has not been satisfied.”

After months of division, he said, the Committee’s unanimous vote Wednesday “shows our resolve to achieve price stability on a timelier basis. We aim to ensure that credit and financial conditions are consistent over time with our mandate; that relative price changes in some sectors of the economy do not broaden; that inflation compensation in Market prices stays low, and that inflation expectations remain well anchored.”

Although he did not participate in the SEP exercise, Warsh agreed that “inflation risks are to the upside, while labor risks are roughly balanced.”

Recently, Warsh joined with other central bankers and finance ministers at the Group of 20 meeting in Asheville, NC, and he said “most central banks are facing price pressures, and making their own judgments consistent with our remit.”

Asked what had changed since the July 28-29 FOMC meeting to convince the Committee the time had come to raise rates, Warsh began by saying that “a good majority of my colleagues seven weeks ago thought seven weeks is a good investment, a way to buy time so we can make a wise decision.”

Since then, he listed “three things that happened”:

– first, increasing evidence that the economy and labor markets have strengthened;

– second, “inflation trends….. My judgment some weeks ago was the inflation summer trends weren’t passing the test. I have seen very little information since that would make me reverse that decision, so I have stuck with it,” and

– third, changes in “geopolitics. There is no hiding from hot spots around the world, and our judgment about what is the most likely, or least likely of the geopolitical situation has changed.”

“All three of those things helped themselves to a firm, unanimous decision today,” he said.

Asked if the FOMC’s move had made rate levels “restrictive,” Warsh said he and his fellow policymakers were, like him, “hard pressed” to call financial conditions “restrictive,” so “we removed a dose of accommodation, so that financial and credit conditions would be more consistent with our ultimate objectives. That was the decision. That was our judgment.”

“We will continue to evaluate that prospectively,” he added.

As for why he himself had come around to the view that a rate hike was needed, Warsh said, “My suspicion when I showed up (in May) was that the US economy was strengthening. Even over the last several weeks we have data broadly defined that says the economy has, indeed, strengthened. Underlying growth is higher.”

“Inflation is the problem,” he continued. “Stable prices have been the problem for now more than 5.5 years. So what the Committee decided to do today was take an action to ensure a timelier return to our price stability objective.”

“Price stability is foundational to economic growth, and I think we took an important step today to deliver it,’ Warsh added.

Pressed to say what more the Fed will do to lower inflation “at sufficient speed,” Warsh again refused to say what that might entail.

“My business is to not give forward guidance, but my commitment in June was to reaffirm to the American people, to anyone listening that, we will deliver price stability,” he responded. “. My commitment in July was to say we want to buy a little bit of time. We want to evaluate what is happening across a raining of dimensions, and what I said in Jackson Hole in August is we are committed to a discipline, not to a decision.”

“Today’s action starts to show we are serious about this,” Warsh went on. “And we will deliver on the price stability objective, and as the statement said, we will do it on a timelier basis.”

“That is our decision, and when we continue our discussions over the course of the next several weeks and months, we will have more to say about it, but I am ill prepared to pre-judge those future actions,” he said.

Warsh made a rate hike all but inevitable when, keynoting the Jackson Hole symposium on Aug. 28, he effectively declared war on inflation: “We must be confident that underlying inflation is moving to our objective, clearly and at sufficient speed. Otherwise, we have work to do. That’s our job . . . our mandate . . . and our charge to keep.”

After that assertion, it was regarded by many as only a question of how bad the inflation data would turn out to be, and since Jackson Hole, government statistics showed continued price pressures, combined with labor market strength, in the month of August.

After a disappointing July jobs report, the Labor Department announced that non-farm payrolls leaped a much more than expected 162,000 last month, while the unemployment rate remained at 4.1% — seemingly indicating the job market remains healthy and in no need of monetary stimulus.

A week later, the same agency reported that the consumer price index rose at a faster 0.4% in August, leaving it up 3.4% from a year earlier. The core CPI also picked up the pace last month to a 0.3% monthly gain, although it moderated a tenth to 2.4% from a year ago.

Even less encouraging, the uptrend of the producer price index also accelerated in July to 0.4%, leaving the year-over-year PPI up 5.4%. The core PPI was 4.2%.

The Atlanta Fed’s Sticky-Price CPI, a weighted basket of items that change price relatively slowly,  rose at an annualized 3.1% last month.

The Fed pays very close attention to inflation expectations, and the signs there are not encouraging either. The Universitiy of Michigan’s early September consumer sentiment survey showed that consumers expect prices to rise 4.6% over the next year, up from 4% in August. Inflation expectations for the next five to 10 years also ticked up to 3.4%, seemingly belying frequent Fed assertions that longer term inflaiton expectations are “well-anchored.”

The 1.2% August bounce-back in retail sales announced Wednesday morning would seem to work in the same direction of showing an economy resilient enough to withstand some Fed tightening.

Adding to pressure on the Fed to raise its short-term administered rates at this meeting was the recent upsurge in longer term market rates, with the 10-year Treasury bond yield surpassing 5% to its highest level since 2007 Tuesday. Warsh had put great store by market signals, and the bond market was essentially telling him the FOMC had to act to contain inflation or face even higher yields that could undermine the “maximum employment” leg of the Fed’s dual mandate.

Given their perennial worries about inflation expectations and given the high odds Wall Street was placing on a rate hike, it seems likely that Warsh and his colleagues felt they had little choice but to tighten modestly to preserve what was left of their closely guarded credibility.

Asked about the spike in bond yields, Warsh gave three reasons: “economic strength”; “competition for capital,” and “geopolitics.”

Warsh led the FOMC on a higher rate path despite pressure from Trump, who appointed him in the hope that he would steer a more accommodative monetary policy course.

Trump had largely avoided jawboning the Fed since Warsh succeeded Powell in May, but 12 days before the FOMC rate decision, the President took to Truth Social with an eyebrow-raising post seemingly directed at the central bank: “LOWER THE RATE OR I’LL STOP TRADING WITH COUNTRIES WITH WHICH WE HAVE A DEFICIT.”

The White House blast came a day after the Commerce Department announced that the US trade deficit widened $17.4 billion to $88.6 billion in July,

(So far, at least, Trump has refrained from insulting Warsh as he did Powell, whom he

called “numbskull”, “knucklehead”, “major loser” and “Mr. Too Late,” among other things.)

Asked several times about Trump’s rate demands, Warsh replied, “I don’t have anything for you on that.”

The rate hike marks a major – and unusual — shift in the direction of monetary policy.

Typically, over the years, before raising rates, the FOMC would first drop any easing bias in its policy statement, move to “neutral” phraseology, and then adopt a tightening bias, before actually raising rates. Powell said as much in his final press conference following the April 28-29 meeting, at which three Federal Reserve Bank presidents (Cleveland’s Beth Hammack, Minneapolis’s Neel Kashkari, and Dallas’s Lorie Logan) dissented against keeping the easing bias.

Not this time. The FOMC went from easing to tightening without going through the usual, intermediate steps of moving from an easing bias to a neutral stance to a tightening bias in its policy statement — in part, perhaps, because Warsh had abandoned the practice of providing “forward guidance.”

The FOMC’s last rate action came on Dec. 10, when it cut the funds rate by 25 basis points, completing 75 basis points of easing in the fourth quarter of last year. That followed 100 basis points of easing in the fourth quarter of 2024 – for a total of 175 basis points of rate reductions over a year and a half.

Because the December rate cut still left the funds rate 60 basis points above the FOMC’s then-3.0% estimate of the “longer run” or “neutral” rate, many expected the FOMC to make further rate cuts in 2026. And indeed the FOMC continued to lean toward further easing in its January, March and April policy statements.

The rate hike came as no surprise, however. Warsh’s own anti-inflationary rhetoric, combined with the unfavorable inflation data, adequately prepared financial markets. By the time of the meeting, a rate hike was considered all but a foregone conclusion.

In the economic forecasts accompanying their rate projections, Fed officials further increased their forecast of inflation, as measured by the price index for personal consumption expenditures (PCE). PCE inflation is now forecast to be 3.7% in the fourth quarter of this year, up from the 3.6% forecast in the June SEP. PCE inflation is projected to fall to 2.3% in the fourth quarter of 2027, and to 2.1% in 2028 – just above the 2.0% target.

Core PCE inflation is forecast at 3.4% in the fourth quarter of this year, up from 3.3% in the June SEP. Core inflation is expected to moderate to 2.5% in the fourth quarter of 2027 and to 2.2% in 2028.

FOMC participants forecast that the unemployment rate will average 4.1% in the fourth quarter of this year, down from 4.3% in the June SEP. It is forecast to stay at 4.1% over the next two years.

Real GDP growth is forecast at 2.3% from a year ago in the fourth quarter, relative to a “longer run” (or potential) growth rate of 2.0% — compared to 2.2% in the June SEP. It is projected at 2.4% in the fourth quarter of 2027, and 2.2% in 2028.

In conjunction with the 25 basis point increase in the federal funds rate, the FOMC raised the minimum bid rate on standing overnight repurchase agreement operations to 4.0%. The offering rate on standing overnight repurchase agreements was raised to 3.75%.

At the same time, the Fed Board of Governors raised the primary credit rate, at which it lends to member banks at the discount window (the primary credit rate), by 25 basis points to 4.0%.