Fed Rate Decision: Warsh Faces October Test After First Hike

From Jackson Hole questions to a rate hike

In late August, as Kevin Warsh prepared for his first Jackson Hole keynote as Federal Reserve chair, the questions he faced fell into five groups: forward guidance, bond market stress, inflation, his promised "regime change" at the central bank, and the Fed's independence from the White House.11 About seven weeks later, his actions have answered some of these questions clearly. Others are as open as they were in August. The next test comes on October 28, at a meeting that falls less than a week before the midterm elections.27

The main facts are not in dispute. On September 16, the Federal Open Market Committee voted 12-0 to raise the federal funds target range by a quarter point to 3.75%–4.00%. It was the Fed's first hike since July 2023 and the first under Warsh.14 Warsh had been sworn in as Jerome Powell's successor in May. Until August he had said little about where he thought rates should go.11 The September move turned his tough talk into policy. How far he intends to take it is still unknown.

Question one: Is the Fed done with forward guidance?

Yes. Warsh has been consistent on this more than on anything else. Critics had warned before Jackson Hole that giving up forward guidance could add volatility to an already jittery bond market. ING's James Smith argued that saying less about the rate path, and about what the Fed is watching for, could make things worse.11 Warsh did not budge. In his September press conference he refused to say whether the hike was the first of several or a one-off. He described it only as removing "a dose of accommodation."4 He also said plainly that the Fed was no longer in the forward guidance business and would not prejudge future decisions.2

The result looks contradictory. Warsh again submitted no projection, and Business Insider reported that the missing dot on the chart was his.6 Yet the dot plot from the same meeting was a clear signal in its own right: 16 of the 18 officials who submitted projections expected at least one more hike in 2026.322 So the committee is still giving guidance. The chair just isn't. Admiral Markets' breakdown shows two officials expecting no further move, 12 expecting one more and four expecting two.21 That makes the median clear enough that the chair's silence matters less than he may want.

Question two: Has the bond market calmed down?

No. Before Jackson Hole, Mark Zandi of Moody's Analytics blamed part of the bond-market uncertainty on Warsh's refusal to give guidance, along with large deficits.11 Things have since gotten worse. The 10-year Treasury yield has reached levels last seen in 2002, and Fed officials at the September meeting discussed the rise.22 Admiral Markets reports an intraday high of about 5.34% for the 10-year, a 30-year yield near a 24-year high, and the biggest quarterly rise in yields since 1994.21

Accounts of why yields are rising overlap but put the weight in different places. The September minutes cite expectations of higher Fed rates, the artificial-intelligence buildout and solid growth.22 Fed staff also pointed to uncertainty over the Treasury's debt buyback program.25 Warsh's own explanation was a stronger economy, global competition for capital and geopolitics.2 He also rejected the idea that the hike was driven by the market, saying the Fed holds "an enormous amount of power" and makes its own decisions.56

Economist Robin Brooks offered a sharper reading. He argued that Warsh turned hawkish at Jackson Hole without new data, after long-term yields rose following his July press conference. Brooks asked whether the shift was really about holding down long-term yields, which is the opposite of what tightening is supposed to do.14 That is a commentator's view, not settled fact. Still, the timeline he lays out is hard to dismiss. Futures odds of a September hike rose from 36% a month before the meeting to above 90% by meeting day.2

Question three: Will he raise rates to fight inflation?

This question now has a clear answer. Before Jackson Hole, The Times' Mehreen Khan wrote that investors wanted a firm statement that Warsh was willing to raise rates.11 He gave one in two steps. At Jackson Hole he said underlying inflation had to be moving toward the Fed's objective "clearly and at sufficient speed." In September he said that standard had not been met.510 "The plain fact is that inflation is too high and has been for too long," he said at the press conference.7

The harder question is whether one hike is enough, and recent data has made that less clear. Core PCE inflation came in at 3.0% for August and headline at 3.4%. Both were well above target but softer than expected, partly because of changes in how some inputs are calculated.22 The September jobs report showed only 29,000 new jobs.21 How weak that is depends on who is reading it. One analysis called the report "fine" and said the labor market was stable.28 Others saw clear cracks in hiring.26

Markets have scaled back their bets. Futures-implied odds of an October hike fell from about 70% to roughly 20%.21 As of October 9, only one of 14 brokerages surveyed, Bank of America, expected a move in October.27 Fed officials have helped cool expectations. Governor Christopher Waller said further hikes "do not need to come at consecutive meetings."27 New York Fed President John Williams said one more increase "late this year" may be appropriate.28

Question four: What does "regime change" actually mean?

This question remains the least answered. Before Jackson Hole, Claudia Sahm wrote that Warsh's vision lacked detail and that this was hurting his credibility: observers knew what he disliked about the Fed but not what he would put in its place.11 He has delivered pieces of it: shorter statements, no projection from the chair, and the line that "inflation is a choice."6 His Jackson Hole speech also spent time on AI. He raised open questions about whether the technology will bring a lasting productivity boom and what it means for workers.15

The strongest evidence of change is inside the committee. The July meeting had three dissents in favor of a hike, the most this early in a new chair's term in 56 years, according to one analysis.8 September was unanimous.8 One commentator called the shift in the committee's center of gravity between June and September "seismic."28 But the September minutes show unity on that vote alongside real disagreement about what comes next. Some officials want more hikes and others prefer to wait.9 Warsh has a united committee for now, but not a settled plan.

Question five: Is the Fed independent of the White House?

On rate policy, so far, yes. The September hike ran against the Trump administration's push for lower borrowing costs.4 The New York Times noted that the president did not publicly attack Warsh over the decision, a clear change from how he treated Powell.7 Warsh described independence as "a two-way street": the Fed stays out of trade and fiscal policy and expects others to stay out of monetary policy.6

Doubts remain. During confirmation, Senate Banking Democrats accused Warsh of refusing to say whether he had signed a loyalty pledge or to name any policy on which he disagreed with the president.18 He has also previously argued for revisiting the 1951 Treasury-Fed Accord, which underpins the Fed's separation from the Treasury.11 One hike does not settle the matter. The October decision will add another data point, because the meeting comes six days before the November 3 election.28

The likely October outcome

On balance, Warsh has answered the inflation question, held his position on guidance, and left the regime-change and independence questions mostly open. The most likely outcome on October 28 is a pause, with the next hike in December. Most forecasters expect that sequence.27 Futures on October 5 put the odds of at least one hike by December at about 81%.21

The main risk to that view is the September CPI report on October 14. One forecast calls for a 0.6% monthly rise, which would lift annual inflation to 3.6%.30 A reading that hot could bring October back into play.27 One-year consumer inflation expectations are already at their highest since May 2023.22 If the data comes in hot, a pause in October would be hard to square with Warsh's demand for progress "at sufficient speed."