After much anticipation, Kevin Warsh raised interest rates for the first time as the new Fed Chairman. Until last month, most people would not have believed this would happen so quickly, after Trump hand-picked him to succeed a defiant Powell.
Fed Funds Rate Decisions, Past 8 Meetings
The rate hike now completes a year-long round trip in which the base rate fell from 3.88% to 3.63% in October 2025 and has now returned to 3.88%.
Interestingly, according to WSJ, Trump has voiced support for Warsh after the meeting, claiming that the two spoke beforehand and Trump gave him the go-ahead. Given the Chair cannot single-handedly veto the board anyway, this was likely more about Trump projecting strength rather than showing actual approval for higher interest rates.
Warsh is also very astute in not showing his own hand by staying away from the Dot Plot submission, so he could continue dancing between the fiduciary duty of monetary policy and a vocal White House.
Dot Plot, the FOMC Member Projection of Base Rates in 2026 to Long Term
Speaking of the Dot Plot, the FOMC members have raised their year-end interest rate projection to the 4.00-4.25% range, with four members backing two more hikes instead of one. That implies four people want to hike in both the October and December FOMCs. What a way to ruin the midterms and Christmas!
The median dot for 2027 landed at the 4.00-4.25 range again, but with 8 people (out of 18) preferring 4.25-4.50% instead. On the margin, that’s hawkish.
FOMC Hawkish / Dovish Tonality NLP Analysis
Using an NLP analysis of the statement language, vote split, dot-plot shift direction, and press-conference tone, we observe that the Fed’s hawkishness has increased over the past 5 meetings, with the latest meeting even more hawkish (a score of 6.5/10) than the one before (6/10).
And the single chart below is why.
Unemployment Rate vs PCE Inflation
The Fed’s twin mandate is maximum employment (or minimum unemployment) and price stability.
Maximum employment means if you wanted a job, you could get one. At a 4.1% unemployment rate, this target is very much met. The unemployment rate is near multi-decade lows and not a policy concern.
Price stability, in technical terms, means a 2% PCE target (not CPI). It has been rising since last summer (even before the war). The latest reading of 3.7% (July level) is nearly double the policy target.
Analysis of the Fed’s Focus in each FOMC
Since early summer, the Fed has become more vocal about inflation while simultaneously expressing comfort over the labour market and economic growth.
Moreover, the Fed does not deem the current financial conditions, with long-end yields around 5%, to be restrictive.
Therefore, high inflation + a strong labour market + robust economic growth + healthy financial conditions = conditions for a rate hike.
But the rate hike is not going to re-open the Strait of Hormuz
Correct - it doesn’t, unless it indirectly pressures the White House to wrap things up sooner, which is arguably also beyond the White House’s unilateral control at this stage.
Furthermore, rate hikes do not directly affect any single line item in inflation either.
The rate hikes are targeted at limiting the impact of the energy shock from spilling into 2nd- and 3rd-order effects, i.e. from broadening out, by taming the demand side of the equation. It also helps anchor inflation expectations so they don’t spiral into a self-fulfilling inflation crisis.
Think of the Fed as having a lot of chips banked from a robust economy and labour market. Now, the Fed is moving some chips from these healthy areas to the inflation side. We might get a little weaker growth or some job losses (by the way, the Fed won’t actually admit this), but the tradeoff may be worthwhile if inflation outside the energy shock can calm further.
In short, the Fed thinks that even if it is making a policy mistake, it can afford to do so now. Waiting could create a worse environment for them and push them to do more rapid rate hikes into a weaker labour market.
What does the market think now?
The Fed Funds futures market hasn’t reacted much to the FOMC. It continues to show an expectation of three more quarter-point hikes by the end of 2027. This is more hawkish than most dot plot projections. However, given the Fed’s track record of chasing the hikes/cuts once they get going, the market expectation sounds about right.
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