Original article by The Wall Street Journal reporter Nick Timiraos
Compiled by | ExpressDeliveryMan@Odaily Planet Daily
Editor's Note: Nick Timiraos, a Wall Street Journal reporter known as the "Fed Whisperer," analyzes in his latest article that the Fed may implement its first rate hike in three years next week, and the market expects it not to be a one-off event, with at least three cumulative hikes forecast by next June. Kevin Warsh's reluctance to signal a path may struggle to curb extrapolative expectations. August's core inflation exceeding expectations and rising oil prices due to Persian Gulf tensions make holding steady even more difficult. The current disagreement among officials lies in whether a single 25-basis-point hike is sufficient, and whether a larger adjustment is needed, with quarterly economic forecasts potentially serving as a key signal.
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Investors have almost concluded that the Federal Reserve will raise interest rates next week for the first time in three years. The harder question is: what happens after that.
Since almost no one inside the central bank believes a single 25-basis-point hike alone will bring down inflation, a decision to raise rates next week would reflect a judgment that rates have been at the wrong level. If that's the case, one hike won't solve the problem.
The Fed rarely acts unless officials are sure one action won't be enough. Former Fed Vice Chair Richard Clarida said: "If they hike next week, we're definitely going to see more hikes."
Raising rates seven weeks before the midterm elections is complicated enough. Putting the Fed on a path for further rate increases would be even trickier. Trump chose Kevin Warsh as Fed chair partly because he anticipated a more harmonious relationship than with Jerome Powell. Trump has indicated he expects the new chair to deliver lower rates.
Other senior officials are also applying pressure. Vice President Vance said last week the administration would welcome help from the Fed on rates; Treasury Secretary Scott Bessent argued that recent inflation reflects supply shocks and the Fed shouldn't tighten in such times.
Since the Fed established the federal funds rate as its primary tool for influencing borrowing costs in the 1990s, the U.S. central bank has raised rates only once as a 'one-and-done' move, in 1997. Clarida predicts the likely action next week "is definitely not just one."
Warsh said in July he was skeptical the Fed could guide the economy through minor adjustments, giving investors reason to think the same. He said: "I don't think we're good at fine-tuning." Analysts said Friday a chair skeptical of fine-tuning is unlikely to hike 25 basis points and declare the job done.
Fed Governor Christopher Waller expressed a similar view last week while outlining scenarios where the Fed could wait: A 25-basis-point hike at one meeting versus another won't bring inflation down to 2%.
"Once you decide to tighten, you tighten enough so you feel you've changed the level of restrictiveness in a meaningful way," said former Fed senior adviser and Piper Sandler strategist Kurt Lewis.
The conditional case for holding rates steady that Waller laid out last week (similar to what officials did in July) hinged on Fed forecasts. Officials forecast in June that monthly inflation would slow in the second half as tariff effects faded, and June and July data confirmed that. However, Friday's report painted a different picture: a key measure of underlying consumer prices (CPI) was stronger than expected in August. This followed favorable jobs figures and renewed oil price increases due to Persian Gulf tensions.
Lewis said the decision to hike or hold "has been a close call for a long time." Friday's report "was the straw that broke the camel's back."
As a result, investors this week stopped viewing the September rate question as merely a one-meeting issue. Markets now expect at least three cumulative hikes by next June, up from two previously. Before this week, volatility in rate markets only affected the timing of hikes, not the ultimate number.
In his speech last month in Jackson Hole, Wyoming, Warsh laid groundwork for the 'rates are at the wrong level' argument. He said he saw little evidence borrowing conditions were restraining the economy, and better June and July inflation data didn't convince him the underlying trend was improving.
Action based on that reasoning naturally raises an obvious follow-up: How much higher? Fed chairs have long dealt with this by explaining the hike's purpose—such as recalibrating rates, buying insurance, or making a risk-management adjustment—without necessarily promising the next step. Warsh has been reluctant to explain the Fed's decision-making process and has long argued that policy guidance ties the central bank's hands.
Without explanation, a mere 25-basis-point hike could morph into something larger in the market's hands. "If you don't explain the policy, your policy action can be overinterpreted, leading to policy overshooting," said Vincent Reinhart, chief economist at BNY Mellon Investment Management and former head of the Fed's monetary affairs division.
He said markets assume a first move implies more to come and will price in too much. Reinhart said without guidance, "you can't push that back down."
The Fed has a tool that might help shape expectations next week. Officials submit forecasts for growth, unemployment, inflation, and expected interest rates four times a year. These anonymous projections—which Warsh declined to participate in at his first meeting in June—could show how many hikes the committee is considering.
"There will be more signals than usual" in the projections, said Dean Maki, chief economist at hedge fund Point72 Asset Management.
Warsh could go further and personally cap expectations. Maki said, for example, if he said this hike was taking back some of last year's cuts, investors would interpret that as meaning two to three hikes at most. He added: "But that would violate his philosophy that the Fed's job isn't to provide that kind of forward guidance."
Reinhart said he worries markets are pushing the Fed into a hike it may not yet need. In his view, investors are overreacting to energy-driven inflation volatility, while the slowly moving parts of inflation have been gradually declining, just masked by high-frequency energy price swings.
A rate hike might help stabilize long-term yields that have risen in recent weeks, said Ed Al-Hussainy, a portfolio manager at Columbia Threadneedle Investments. Holding steady could make that sell-off more disorderly if investors think the Fed will tolerate higher inflation.
San Francisco Fed President Mary Daly described the Fed's choice as between two economic scenarios. One where shocks from the past two years gradually fade and the Fed's current policy setting is sufficient to bring inflation down. The other where shocks compound, inflation broadens, and the Fed needs a much larger adjustment than 25 basis points. She said in early August the first scenario was still her baseline, but the probabilities have moved closer since.
Daly said the second scenario might require more than a small 25-basis-point adjustment and a departure from the gradualism the Fed has traditionally used to navigate uncertain economies.
Officials eager to act draw the opposite conclusion from the same premise. St. Louis Fed President Alberto Musalem said in a speech last month: "Earlier, gradual, small rate hikes are preferable to potentially later, more abrupt rate changes, which would be more disruptive and costly." He supported a July hike.
Their case rests less on the past three months than the future: high diesel prices from the Iran war not yet transmitted through shipping networks, a new round of tariffs, AI construction straining power and tech supply chains, and high stock prices supporting consumer spending.
Musalem said the likelihood of inflation being significantly above the Fed's target over the next 12 to 18 months is now higher than the likelihood of it falling back to the central bank's 2% target.
