Warsh keeps December rate hike in play as Fed holds steady

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Warsh keeps December rate hike

Highlights

Fed holds rates at 3.75% to 4%.
Warsh signals more hikes without a timeline.
Markets anticipate December and March hikes.

The Federal Open Market Committee voted 10-2 to maintain its benchmark rate at 3.75% to 4%, with two policymakers favoring an increase. Investors interpreted Warsh's remarks as support for additional monetary tightening, although some traders had expected a stronger signal, Bloomberg reports.

Strong economic growth gives the Fed room to act

Kevin Warsh emphasized the strength of the U.S. economy during his post-meeting press conference. First-half gross domestic product growth was revised upward to 2.4%, while third-quarter expansion was tracking above 3%.

Business investment has recorded double-digit gains, and weekly unemployment claims remain near historic lows. These conditions suggest the economy can withstand higher borrowing costs while the Fed concentrates on bringing inflation back to its 2% target.

The central bank raised rates in September for the first time in three years. Warsh pointed to that unanimous decision as evidence of its willingness to respond to persistent price pressures.

Fed Governor Lisa Cook and Cleveland Fed President Beth Hammack dissented Wednesday, preferring an immediate increase. Other policymakers concerned about inflation supported holding rates steady.

December rate increase remains in focus

Warsh declined to provide explicit guidance on the timing of future moves, emphasizing the importance of incoming economic data. New inflation and growth figures scheduled for Thursday could help shape the outlook before the December meeting.

Several economists expect two additional rate increases, potentially in December and March 2027. Such moves would largely reverse the reductions introduced in late 2025 to support a weakening labor market.

Warsh also acknowledged that financial conditions had tightened since September but stopped short of describing them as restrictive. He suggested that stronger productivity, including technological improvements, could support economic expansion without necessarily generating additional inflation.

Treasury yields fall as investors assess the rate outlook

Financial markets responded cautiously to the decision and Warsh's comments. The yield on two-year U.S. Treasury notes, which is particularly sensitive to expectations for monetary policy, fell four basis points to 4.7%. Longer-term yields edged slightly higher.

The decline in short-term yields suggested that some investors viewed Warsh's remarks as less aggressive than anticipated. Nevertheless, futures markets continued to price in rate increases in December and March.

The distinction matters for businesses and households facing higher financing costs. Additional rate hikes could make mortgages, corporate loans and other borrowing more expensive, even as economic growth remains relatively strong.

The Fed now faces a difficult judgment: whether inflation requires further restraint or whether the September increase and tighter credit conditions will prove sufficient. With inflation above target and employment holding up, investors expect the central bank to remain focused on price stability while leaving the timing of its next move dependent on economic data.

Earlier, we reported that Goldman Sachs sees one more Fed hike as stocks may benefit.

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