Chairman Warsh Is Off to a Great Start

Since taking office in May, Federal Reserve Chairman Kevin Warsh has said all the right things about inflation: that the Fed has missed its target for over five years, that that miss is unacceptable, and that he is committed to price stability. This week, the chairman matched that rhetoric with action by increasing the central bank’s policy interest rate. The Warsh Fed is off to a great start.

Given that the Fed voted against a rate increase as recently as July, I am surprised that the August data seems to have moved the center of gravity of the rate-setting committee so dramatically. Those data could have supported the argument that the disinflation of June and July continued into August.

But I am glad that the center of gravity moved. Inflation is clearly trending upward — and that upward trend is not driven entirely by higher energy prices and tariffs. The graph below shows my preferred measure of inflation, which does not include prices for goods and energy services (among other omissions and alterations).

Chairman Warsh is absolutely right that the mild disinflation over the summer should not obscure the clear upward trend in inflation. Moreover, this trend is not being driven by tariffs or higher energy prices. pic.twitter.com/8dGWpcMFct

— Michael R. Strain (@MichaelRStrain) September 16, 2026

How high do rates need to go? In September 2025, I was opposed to the Fed’s decision to begin lowering interest rates. I wrote at the time:

The case for beginning a monetary-easing cycle this month rests on three judgments. First, the deterioration in headline payroll gains – the economy has added an average of just 29,000 net new jobs per month over the past three months, and employment contracted in June – is a strong indication of a weakening labor market. Second, underlying inflation is on course to return to the Fed’s target, albeit gradually. And third, there is considerable distance between the Fed’s policy rate and the rate at which the Fed would no longer be holding back economic growth. The Fed estimates this so-called neutral rate to be 3%.

On each point, the Fed is off base.

This week, Chairman Warsh undid one of these mistaken rate cuts. I expect at least one more will need to be undone before the end of 2026.

The chairman’s post-meeting press conference has left some important questions unanswered. In my latest Financial Times column, I discuss them:

Warsh characterised the Fed’s decision as removing “a dose of accommodation”. This implies that he is using a long-established monetary policy framework — that there is a level of the funds rate below which the Fed is supporting economic demand and above which it is restraining demand.

But in the press conference, Warsh rejected that framework, dismissing it as an interesting academic exercise with no “operational effect on decisions” the Fed makes. He will need to explain how he will calibrate the funds rate in the absence of this.

Second, Warsh argued that he does not believe there is a trade-off between stable inflation and full employment. In the short term, this view has major implications for monetary policy. If disinflation does not come from increasing economic slack, then does Warsh think it is entirely driven by inflation expectations? If short-term demand can be increased without inflation, then does he think that inflation in 2021 was largely unaffected by that year’s massive fiscal stimulus?

Check out my column for my full argument — and for my discussion of the vital service that Chairman Warsh did this week in shoring up the independence of the central bank from politics, one of the foundations of prosperity. As I wrote, the chairman “has shown that he has steel in his spine.”