From rate cuts to rate hikes: How Kevin Warsh is rewriting Fed policy

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Kevin Warsh is rewriting Fed policy

Inflation as a monetary choice

Kevin Warsh became the Chair of the Federal Reserve in May 2026 with a message of regime change. On September 16, the central bank announced its first interest rate increase since 2023. It increased the federal funds rate by a quarter point to a range of 3.75%–4%. The unanimous decision confirmed a break from the monetary stimulus policy of late 2025. This decision confirmed that the Warsh strategy would focus on price stability with a reliance on more traditional monetary tools.

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Drawing on Milton Friedman’s famous claim that inflation is “always and everywhere a monetary phenomenon,” Warsh has repeatedly placed responsibility for the inability to meet the 2% target on the central bank. In his Jackson Hole speech in August 2026, he stated that the Fed bore responsibility for “65 months of sustained, elevated inflation” and that “price stability is not self-executing.” While energy costs have contributed to the recent reacceleration, Warsh emphasizes that the Fed must still control inflation.

The first hike and the new policy stance

The September decision is the first expression of the new monetary worldview. After holding rates steady at his initial meetings, Warsh and the FOMC concluded that summer data required urgent adjustments. Economic activity remained solid, the labor market stable near full employment, and financial conditions not restrictive. In that environment, officials removed “a dose of accommodation.”

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Updated projections showed a majority of participants expecting at least one additional hike by year-end. Warsh himself has declined to reveal Fed’s actual plans. That position is consistent with his skepticism of the summary of economic projections as a communication tool. However, most analysts believe that the Fed is prepared to tighten monetary policy further if inflation does not fall to the target level.

A quieter Fed and reduced forward guidance

A core element of Warsh’s approach is that the central bank talks too much. He has criticized forward guidance as it could encourage market participants to treat Fed statements as trade signals rather than policy tools. In Jackson Hole, he joked that his outline was “a trail map… just don’t call it forward guidance,” and he has spoken of preferring “a quieter Fed.”

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So the recent policy statements have become shorter, and press conferences are more restrained. Warsh has launched internal task forces to review communications, data sources, the inflation framework, and the balance sheet. The ultimate goal is achieving greater flexibility and clearer accountability for outcomes instead of unreliable forecasts.

Balance sheet discipline and classical tools

Warsh describes the oversized balance sheet as a negative consequence of the crisis and pandemic periods. Large-scale asset purchases resulted in the lack of coordination for monetary and fiscal policy. The reason is that such measures supported large institutions at the expense of broader markets. A smaller balance sheet, in his view, will allow achieving lower policy rates without the current inflationary risks.

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Warsh rejects the Keynesian belief that inflation and employment contradict one another. High inflation can negatively affect prosperity, he argues. Therefore, restoring price stability supports maximum employment over the medium term. This perspective is also consistent with a monetarist system. He has also expressed optimism that artificial intelligence and productivity gains could become disinflationary over time.

Markets, politics, and the path ahead

The shift in monetary policy has already affected market expectations as observed in Polymarket and other platforms. Rate-hike probabilities rose even after Warsh’s early signals, and the September rate decision confirmed that politicians’ appeals to lower rates would not be followed. Bond yields, mortgage terms, and risk assets remain under pressure.

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Politically, it proves the independence of a Trump-appointed chair from the President administration that advocates for cheaper money. Warsh’s early months demonstrate that Fed is not concerned with affecting market psychology but rather focuses on restoring credibility. Whether this approach succeeds will depend on future data and the willingness to follow the price stability path.

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