At Last, the Fed Begins to Do Its Job

And there it is:

The Federal Open Market Committee approved the following statement for release by a 12 – 0 vote:

The Committee decided to raise the target range for the federal funds rate by 1/4 percentage point to 3-3/4to 4 percent, in support of the Federal Reserve’s dual mandate. The Committee is continuing its policy of maintaining ample reserves in the banking system.

Economic activity is expanding at a solid pace. While uncertainty remains elevated owing, in part, to geopolitical developments, domestic spending has been resilient. Productivity growth is strong, and capital investment is robust. Job gains have kept pace with the workforce, and the unemployment rate has changed little.

Inflation remains elevated. Today’s policy action will support a timelier return to the Committee’s 2 percent goal. The Committee will deliver price stability.

Fed Chair Kevin Warsh isn’t one for many words, but he used enough. One side of the central bank’s congressional mandate, attaining “full employment,” the Fed is doing fine. On the other side, ensuring stable prices, it is not. Monetary policy is nowhere near restrictive; it needed to be tightened. Sorry, not sorry.

Since the Fed typically lowers or raises target interest rates in gradual cycles, today’s rate hike is almost certainly not the last. Warsh told reporters that his committee “removed a dose of accommodation” with this decision, aimed at a “timelier return” to the 2 percent inflation target — not that a single rate hike of a quarter percentage point would do the trick. Markets anticipate one more rate hike (and possibly two) by the end of the year.

Warsh also said that the “least well-off” are those who have the most to gain from stable prices, later defining this group as the roughly 50 percent of Americans who “don’t own financial assets.” His implicit suggestion was that those who do own financial assets may benefit from looser monetary policy. Indeed, Warsh has noticed that generalized inflation does not circumvent stocks, bonds, real estate, and other commodities. Far from it.

That may be part of the reason why the Fed was so reluctant to raise rates for so long, and why it even cut rates when inflation was still above target in 2024 and 2025. Stocks are down today — not because of the rate decision, which was already priced in, but on Warsh’s hawkish rhetoric. If you knew nothing else besides what he said in his press conference, you would think the Fed is prepared to keep raising rates until inflation falls below target and stays there.

And yet, a rule of thumb: Unless the Fed has absolutely no excuse, it will prioritize employment and financial markets over price stability every time. That has been true since Paul Volcker’s tenure, and perhaps before his tenure, too. Even if Warsh were the most hawkish Fed chair in history, he’s only one of twelve votes on interest rates.

The committee’s economic projections, which include members’ anonymous forecasts and were also published today, tell a disappointing yet familiar story: At most, the Fed will increase rates as high as 4.5 percent in the next year, compared with 4 percent today. That would entail only two more quarter-point rate hikes. Core inflation, members expect, will decline to 2.5 percent in 2027 — still above target. The Fed will then call that a victory and begin lowering rates again, down to around 3.5 percent by 2029. This would be a lower interest rate than existed yesterday, but the committee believes that inflation will keep receding to exactly 2 percent regardless.

No, that rosy tale is what central bankers already told themselves the past four years. The Fed raised rates aggressively from 2022 to 2023 to curb inflation, stopped mid-year when core inflation was nearly twice as high as the purported target, and then started cutting rates back down as inflation remained elevated. Three years ago, the committee projected that inflation would sit at 2 percent by 2026 — just as it now projects it will three years from now. Well, inflation is evidently not at 2 percent, and the Fed now finds it necessary to increase rates again.

Americans should be worried that, for a second time, the Fed will declare victory at the first sign of easing inflation and quit before the task is done. As Warsh said last month, no self-executing law of the universe requires inflation to revert to 2 percent. Inflation is a function of monetary policy, and policy must be sufficiently restrained over time to keep the money supply in check.

“Inflation is a choice,” Warsh reiterated today. The Fed has finally begun to do its job of restoring some semblance of price stability. It needs to make sure that it finishes the job this time.