Home Economics, Policy & Regulation FOMC Turns Hawkish to Tackle Inflation
In his first rate hike as Fed Chair, Kevin Warsh raises rates by 25 basis points amid persistent inflation.
In a laconic 132-word statement, the Federal Open Market Committee (FOMC) announced a hike of the Federal Funds rate by 0.25%, to between 3.75% and 4%. It was the first increase in Chairman Kevin Warsh’s tenure and the first hike for the Fed since July 2023.
Warsh noted that the rate move aimed to bring inflation back within the Fed’s stated 2% target, a level it has not been at since February 2021, and did so in a timely manner.
He refused to give forward guidance on whether the current rate hike will be the first of many. Yet, the latest FOMC Economic Projections , released on the day of the rate announcement, show that his colleagues do not expect the median Personal Consumption Expenditures (PCE) and Core PCE rates to reach 2% before 2029.
In a FOMC Recap report published by the Royal Bank of Canada, the authors wrote that 16 FOMC committee members expect another rate increase in 2026. The authors also wrote that the September Economic Projections revised PCE inflation and GDP growth projections up and unemployment projections down, “painting a picture skewed towards inflationary risk.”
When asked why make the hike in September, and not in July when the FOMC voted to maintain the current rate, he and a majority of his colleagues “thought the wiser course of action would be to await new information in the inter-meeting period.”
The inter-meeting period, however, did not deliver the desired results.
“Based on the most recent CPI [Consumer Price Index] and PPI [Producer Price Index] data, the 12-month change in total PCE prices likely was around 3.6% in August,” he said. “Core PCE and CPI prices are running about 3.2% and 2.4%, respectively. Too many categories are still posting increases above 3%, on both a 6-month and 12-month basis.”
The rate increase will not lower inflation or address the rising geopolitical risk, said Kyle K. Moore, chief economist at The Century Foundation.
“Before the war with Iran began in late February, PCE inflation stood at 2.9%,” he added. “By May, it had risen to 4.1%. The biggest price pressures are coming from disrupted fuel and fertilizer supplies, along with erratic tariffs that are raising costs for businesses and making it harder to plan. Raising interest rates will not reopen the Strait of Hormuz, lower energy costs, or reverse a tariff.”
Warsh acknowledged that geopolitical developments continue to elevate uncertainty, but the American economy continues to strengthen.
“New hiring, private-sector earnings, business and capital investment, each of these markers has improved in recent months and is pointing in the right direction,” he said. “Credit flows have been robust, particularly for businesses. And as I said at the policy symposium in Jackson Hole, I would be hard-pressed to describe broad financial conditions as restrictive.”