Fed Rate Decision: Hot Inflation Forces Warsh to Show His Hand

A chair who won't say what comes next

Kevin Warsh took over the Federal Reserve in May promising a quieter Fed: fewer signals, fewer forecasts and less hand-holding for markets. Hotter-than-expected inflation has made that approach hard to keep up. The August consumer price report pushed the Fed into its first rate increase in three years. Now the September report, due Wednesday, October 14, lands two weeks before the next decision, and Warsh again faces calls to explain his plan rather than leave investors to work it out.

The pressure started before any rate moved. In late August, economists were already frustrated that Warsh had dropped the forward guidance his predecessors relied on. At his July press conference he dodged repeated questions about whether the Fed would hike if inflation stayed high, and that left markets confused.25 David Wilcox of the Peterson Institute said Warsh had refused to describe even the basic framework he would use to set policy.27 TD Securities' Gennadiy Goldberg put it more bluntly: Warsh "effectively lost markets" when he spoke.27 Bloomberg reported that investors looking for a real fight against inflation came away doubting his resolve. Within hours of the July meeting, JPMorgan moved its forecast for a rate hike up to December.29

Jackson Hole set the bar, and August cleared it

Warsh's Jackson Hole speech in late August was his attempt to fill that gap. He said inflation was above the 2% target and that the Fed's "predominant focus right now should be on prices." He also played down a run of better summer readings, saying they did not show that underlying trends had meaningfully improved.11 He set out a test for action: the Fed had to be confident that underlying inflation was moving toward its goal "clearly and at sufficient speed," or it would have "work to do."20 The New York Times described this as his fullest explanation yet. It also noted that it left him in a no-win position, since a rate increase before the midterms would mean an immediate clash with the White House.30

The August CPI, released September 11, made the decision for him. Core prices rose 0.3% for the month, more than expected. Headline prices rose 0.4%, taking the annual rate to 3.4%.11 Bloomberg described the result as intense pressure on Warsh to raise rates.23 Politico reported that market-implied odds of a hike went above 85% after the release.24 The two main officials urging patience had been visible in the weeks before. Governor Christopher Waller had urged colleagues to "give disinflation a chance," and New York Fed President John Williams had said the Fed should wait and see.20 CNBC argued that if Warsh held rates steady after that data, people would start asking whether he really controlled the Fed, or whether Trump, Treasury Secretary Scott Bessent or Waller was the shadow chair.11 Scotiabank's Derek Holt made a similar point from the market side. Because Warsh pays so much attention to market signals, Holt said, he had boxed himself in: if the Fed didn't hike when a hike was priced in, when would it?20

The September hike: action without a roadmap

On September 16 the Fed voted 12–0 to raise its target range by a quarter point, to 3.75%–4%. It was the first increase since July 2023.1216 "The plain fact is that inflation is too high and has been for too long," Warsh said, and he stated that the Fed's standard for confidence on inflation had not been met.14 He pointed to the Fed's unanimity several times as evidence of its resolve.12 He also said renewed fighting between the U.S. and Iran, and the rise in gasoline prices that followed, had helped persuade officials to act.14

Even so, he kept his no-guidance stance. Warsh would not say whether the hike was the first of several or a single move, which is unusual for the Fed. He described it as removing "a dose of accommodation."1216 The committee's projections said more than he did. The median projection for the end of 2026 is 4.1%, which implies one more quarter-point increase this year.114 Reports of the breakdown differ. The AP counted 16 of 18 policymakers expecting at least one more hike, with four expecting two.14 Another tally, citing the minutes, said eight participants saw two or more further increases and six saw one.2 Either way, the committee leans clearly toward tightening, whatever the chair says from the podium.

Markets largely welcomed the move, with some caveats. AllianceBernstein's Eric Winograd said the decision and Warsh's handling of the press conference were an important step toward stabilizing bonds. Ten-year inflation expectations fell even as nominal yields rose.12 The Economic Times reported that investors now trusted the Fed's inflation resolve more but were unsure how far it would go, partly because Warsh avoids guidance.18 Trump called the governors politicians trying to hurt him.14

October: the headline is hot, the core isn't

The setup has changed since September. Forecasters broadly agree that September headline CPI will jump to around 3.6%–3.7% a year earlier, mostly because gasoline prices hit records for the month.12 The Cleveland Fed's nowcast puts the monthly headline gain at 0.53%, while core prices are expected to rise only about 0.20%.5 FactSet's consensus is similar: 0.5% headline and 0.2% core, with annual core inflation steady at 2.4%.9 Some trackers expect slightly firmer core inflation of 2.5%.46

The labor market has also softened. September payrolls grew by just 29,000, and unemployment was 4.2%.4 Bloomberg's preview said cooler underlying inflation and slower hiring reduce the urgency for an October 28 hike.7 Market pricing agrees. Morningstar reported a 22% chance of an October hike, down from 55% right after the September decision.9 Other trackers have it at roughly one in four.2 According to the September minutes, released October 7, most participants thought another hike would "likely be appropriate by year end," while stressing that it depends on the data.2

The divisions within the Fed are also clearer now. Waller, who had urged patience in September, said on October 8 that more hikes are probably needed but do not have to come at consecutive meetings. Williams and Vice Chair Philip Jefferson see little urgency. Vice Chair for Supervision Michelle Bowman has signaled she would prefer no more hikes in 2026.1 Minneapolis Fed President Neel Kashkari keeps saying inflation is still too high.15

Where the coverage disagrees

The biggest disagreement is over which inflation number matters. Preview coverage is broadly calm: core CPI near 2.4% is close to the goal, and the headline increase is energy that the Fed cannot fix with rates.39 But the Fed's own preferred measures look worse. The Fed projects core PCE at 3.4% for this year.12 The Cleveland Fed nowcast has headline PCE above 3.5%.5 One-year consumer inflation expectations in the University of Michigan survey are 4.6%.1 Warsh's Jackson Hole argument relied on discounting good monthly readings in favor of underlying trends.11 By that logic, one mild core print should not count as the clear and fast progress he said he needed.

Commentators also disagree on how much the bond market has driven policy. Some analysts think Warsh has been letting rising market yields tighten financial conditions for him.11 The ten-year Treasury yield was 5.27% on October 6.1 In September, Warsh attributed higher yields to stronger growth, heavy AI-related corporate borrowing and geopolitics. He did not mention concerns about fiscal policy or Fed credibility.12

The reading: October is about the message more than the rate

My reading is that an October hike is unlikely unless core CPI comes in at 0.3% or higher. A core reading at that level would be hard to blame on gasoline.3 The more important test for Warsh is what he says on October 28. One Fed watcher argued in July that his tough rhetoric had worked to build credibility but that markets would eventually want action.21 Warsh has now acted once. If he holds in October without explaining what would trigger the next hike, he risks the same confusion that followed his July press conference. That is harder to brush off now, with the September decision the last time Warsh spoke after a meeting. The midterms are November 3, and September PCE data arrives the day after the meeting.14

It is worth remembering how fast things moved in September. Most economists expected the Fed to hold until the August CPI changed the consensus within days.20 Warsh designed his framework to be flexible. So far, hot inflation readings have pushed him to explain it in public, and that pattern is likely to continue through October.