Big questions remain if the Fed’s rate increase is a one-off or the start of a longer hiking cycle

Chair Kevin Warsh hints that he will support further rate hikes until they become restrictive

THE US Federal Reserve raised interest rates for the first time in three years on Wednesday (Sep 16), with chair Kevin Warsh dropping a big hint that it could be the first of several increases.

That could restore US Treasury-market faith that he is on top of the inflation issue, slowing the recent spike in long-term Treasury yields. Or, it could cause new fears that the Fed will prolong its rate-hike cycle, and drive yields up further.

After biding his time in his first two meetings, Warsh and his board acted on his pledge to fight inflation, raising rates by a quarter percentage point to a range of between 3.75 and 4 per cent.

He was cagey in his customary post-meeting press conference, refusing to give his opinion on whether the hike was a one-off or the start of a hiking cycle, as the markets anticipated.

Stocks and bonds hardly budged when the rate hike first hit the tape. But his somewhat cryptic comments at the media conference provoked a sell-off in both markets.

The Dow Jones Industrial Average tumbled almost 2 per cent shortly after his appearance at the podium, though it recovered some of those losses due to a tech stock rebound.

The yield on the 10-year Treasury note – the benchmark for most long-term mortgages, corporate bonds and consumer loans – closed above 5 per cent for the first time since 2007.

Trump’s support for Warsh

US President Donald Trump said he supported Warsh, whom he appointed earlier this year to succeed former Fed chair Jerome Powell.

He blamed the rest of the board’s decision to raise rates, claiming improbably that the target should be below 1 per cent.

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If Warsh defied Trump by raising rates, he spared the president’s blushes by referring to “geopolitics” generally, rather than the Iran war specifically, as one of the causes of resurgent inflation.

He added that the Fed was acting because inflation “is too high, and has been for too long”.

While he acknowledged that the central bank could not bring down the price of petroleum or any other individual product, he said it could stop those price increases from spreading to other areas of the economy.

Some market watchers, however, were sceptical.

“The question is: what does 25 basis points really do for the economy?” asked Allyson Heumann, a professor of practice at Tulane University’s Freeman School of Business.

“The main reason we are having these sorts of large inflation issues are tariffs, oil and artificial intelligence spending. None of those are fundamentally going to change because of a 25-basis-point increase in interest rates.”

Warsh has a theory that his predecessors pandered to the markets too much, trying to shape expectations with policy instead of sticking to its knitting.

In his view of things, it was Powell and others who engaged in a guessing game with the Treasury and stock markets that made the fundamentals of each market unclear.

But Warsh himself has not ended the guessing game; markets are just swinging more wildly because he is providing fewer clues.

Of course, he is only one of 19 officials sitting on the Fed board. And he was the only one on Wednesday who did not provide specific guidance on future Fed policy. Of the other 18, 16 predicted at least one more rate increase in 2026.

The summary of economic projections – known as the dot plot – also “showed stronger growth, higher inflation and a lower unemployment rate across the forecast horizon, despite two hikes this year”, said strategists at Bank of America Global Research in a research note.

By emphasising the strength of the US economy and saying that Fed policy is not yet restrictive, Warsh hinted that he would support rate hikes until they became restrictive, the strategists said.

The stock-market bulls argued that the Fed’s dot plot does not suggest the kind of gruelling cycle that had Powell’s board boost rates by 5.25 per cent in the space of a couple of years.

“Unless the Fed signals that they want to slow down the AI capex boom, even two to three rate hikes over the next year may be quite dovish,” said Sonu Varghese, chief macro strategist at financial consulting firm Carson Group.

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