NEW YORK — The Federal Reserve's stated reason for raising interest rates at its Federal Open Market Committee meeting on the 16th was to counter inflation with a one-off move of one or two hikes. In the dot plot of the Summary of Economic Projections — a quarterly chart showing each Fed official's rate forecast as a dot — all 18 FOMC participants other than Chair Kevin Warsh put the median rate at 4.125% for both this year and next. That points to one more increase this year followed by a hold from next year. The Fed also projected a rate of 3.875% at the end of 2028, signaling it could begin cutting two years from now. Analysts read that as reflecting concern that interest costs on U.S. federal government debt could grow too heavy.
At a news conference that ran a brief 28 minutes, Warsh said the Fed shifted from its July hold because the U.S. economy has strengthened while inflation remains high and the geopolitical situation has changed. "The underlying strength of the economy gives us room to focus on price stability," he said, adding that "risks to inflation are tilted to the upside, while risks to the labor market are broadly balanced." Warsh, echoing his Jackson Hole speech last month, said he remained concerned that a wide range of specific items still showed price increases on both a six-month and 12-month basis. "Productivity growth is strong and capital investment is solid," he said.
The Fed on the same day raised its forecast for the personal consumption expenditures price index this year to 3.7%, up 0.1 percentage point from June. It also lifted its projections for real gross domestic product growth by 0.1 percentage point each, to 2.3% this year and 2.4% next year. The unemployment rate was put at 4.1%, down 0.2 percentage point from June.
Warsh said it was hard to describe current financial conditions as restrictive and that the Fed had removed part of its earlier easing. The message was that this month's increase was not the start of a full tightening campaign but a partial reversal of the three rate cuts totaling 0.75 percentage point delivered between September and December last year as insurance against a downturn. In its policy statement, the Fed softened a reference to the "July conflict in the Middle East" to "geopolitical developments," and added an assessment that domestic spending is solid — signaling a view that demand at home is holding up despite external shocks.
A line from the previous statement saying that supply shocks in some sectors, including energy, had driven prices higher disappeared entirely. Asked whether a rate increase could serve as a response to higher global oil prices stemming from a blockade of the Strait of Hormuz, Warsh said the Fed's job was not to hold down energy prices but to keep price changes from spreading through the broader economy and producing second- and third-round effects.
Still, Warsh did not rule out the possibility that this increase leads into a new tightening cycle. Among the 18 officials other than Warsh, 12 saw one more hike this year and four saw two, while only two favored holding. Markets focused on the fact that the Fed voted unanimously to raise rates while simultaneously lifting the dot plot, reading it as a hawkish signal. The rarity of one-off Fed moves of just one or two hikes also strengthened the case that this meeting marked the opening shot of genuine tightening. The Wall Street Journal called it a striking feature that officials who had unanimously voted to hold in June were persuaded to dissent three months later, describing Warsh as the most hawkish chair since Paul Volcker.
Warsh, who is Jewish, avoided any direct comment on the war between the U.S. and Israel and Iran, steering clear of a head-on clash with the Donald Trump administration. In explaining the rise in the 10-year Treasury yield, he cited a stronger U.S. economy, competition among hyperscalers — operators of very large data centers — to secure capital spending funds, and conflicts around the world, without raising the core issues of national debt or market distrust of the government.
Warsh described the economy as close to full employment, though critics argue that slowing wage growth alongside a low unemployment rate is evidence that job growth in quantitative terms is sluggish.
