The U.S. Federal Reserve raised its policy rate by 25 basis points in September, its first rate increase since July 2023. Attention has now shifted to whether the move marks the start of a new tightening cycle or ends as a one-off increase, as it did in 1997. The comparison is intriguing because Fed Chair Kevin Warsh admires and models himself on Alan Greenspan, the "maestro." Greenspan preferred to explain the state of the economy and let markets infer the next policy step from the data.
In March 1997, the Fed raised rates but gave no clear guidance on further increases. The U.S. economy at the time was growing at an annual real gross domestic product rate in the mid-4% range and unemployment had fallen to the high-4% range, yet inflation remained stable. Strong information technology investment and productivity gains had lifted the economy's supply capacity, while fiscal consolidation and a strong dollar also held down prices. The Asian financial crisis that followed further weakened the case for additional tightening. The Fed ultimately held the rate at 5.50%, and 1997 stands as the textbook case of "one and done."
Conditions in the U.S. economy today are different. In the Fed's September Summary of Economic Projections, headline and core PCE inflation for the fourth quarter of this year were put at 3.7% and 3.4%, respectively. Real GDP growth was projected at 2.3% and unemployment at 4.1%. The Fed's task is to bring inflation — pushed higher by the war in the Middle East and energy supply disruptions — back near its target while avoiding a sharp slowdown in growth and employment. The fiscal backdrop also differs sharply. The Clinton administration cut the budget deficit quickly in 1997 and swung to a surplus the following year, whereas the Trump administration now carries accumulated deficits and the burden of high long-term rates.
There is, to be sure, little need for this cycle to turn into prolonged and aggressive tightening. Had the Middle East conflict been resolved early, the rate increase might have been avoided. But as the conflict between the United States and Iran dragged on and spread to neighboring countries, the Fed had no choice but to act to contain second-round effects.
In the end, the odds that the Fed ends this tightening cycle with a single increase, as it did in 1997, do not look high. Its base case appears to be at least one more rate increase, followed by a prolonged hold while it confirms the path of disinflation. The lesson from Greenspan's Fed in 1997 is not the number implied by "one and done," but that it set the rate path by reading structural shifts in the economy — productivity, prices, employment and public finances. How the Warsh Fed judges the situation in 2026, facing a different economic environment and pressure from the Trump administration to cut rates, bears watching.
