Federal Reserve Chairman Kevin Warsh speaks during a press conference at Federal Reserve Headquarters in Washington, September 16, 2026. Warsh spoke at a press conference after the latest policy meeting about the central bank’s decision to raise interest rates for the first time since 2023.
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Federal Reserve Chairman Kevin Warsh used a few carefully chosen words to explain this week’s decision to raise interest rates and raise troubling questions about what happens next.
Warsh said Wednesday’s decision to raise the central bank’s benchmark interest rate by a quarter of a percentage point was not a specific tightening of policy, but rather the lifting of a “moment of easing”. He further said the move was possible because the U.S. economy appears to have “strengthened” and financial conditions are less restrictive.
This phrase may sound like central bank semantics, but it gets to the heart of what markets are currently discussing. In other words, if the Warsh Fed were to release just a “single amount” of support, how far would it go and what guidelines would it use to formulate policy?
Krishna Guha, head of economics and central banking strategy at Evercore ISI, said in a client note that the phrase was “the only distinctively hawkish element” of Warsh’s comments to the press after the meeting.
“This wasn’t a mistake. It’s a phrase he repeated many times, and it seemed like a very deliberate choice to frame policy this way,” Guha said, adding: “This framing is materially different from what the Fed has used in recent years, raising the possibility of a more liberal approach to the number of rate hikes needed.”
The framework includes adjustments to where policy should be placed relative to the so-called neutral interest rate, which neither promotes nor restrains growth. In turn, a benchmark interest rate that is significantly above the neutral rate is considered restrictive, whereas a benchmark rate that is close to or below the neutral rate is considered accommodative.
What about neutrals?
Mr. Warsh’s decision to mark the rate hike as lifting a “certain amount” of easing could be seen as the first of several steps toward withdrawing support the Fed feels is no longer needed. The Fed aims to bring inflation back to 2%, and policymakers are generally considering raising interest rates as a way to rein in demand and contain price pressures.
“If we take Mr. Warsh’s framework literally, it could increase the likelihood that we will have to keep raising interest rates until the financial conditions facing the private sector are no longer ‘accommodative’, however you define that,” Guha said. “This is a relatively liberal outlook.”
Mr Warsh had the opportunity to clarify what benchmarks he is using to determine how much easing remains in policy.
Asked by CNBC’s Steve Reisman to explain to what extent he sees current interest rates (with a target range of 3.75% to 4%) as being above neutral, Warsh essentially rejected the framework in a statement that goes against the way central bank policy has been run for more than a decade.
Warsh said measuring the benchmark rate relative to neutrality is “academically useful. It’s a useful discussion to think about policy. Do you think there will be operational implications for the decisions we make today? No, I don’t.”
The answer served to add further mystery to the Fed chairman, who has already established a reputation for being cryptic when it comes to how he views the policy wheels that need adjusting.
The market is wondering what will happen next
After the meeting, there was speculation on Wall Street about what would happen next.
One of the initial reactions was that there was a high probability of further rate hikes at the Fed’s next meeting in October. Goldman Sachs has added to its forecast for an increase in October, and Bank of America is also forecasting an additional increase in December. As of Friday morning, the market’s odds of an October rate hike were nearly 58%, according to CME Group’s FedWatch Gauge. A week ago, the probability was 42%.
“The word ‘easing’ means ‘stimulating’ at the Fed. This comment suggests that the current monetary policy stance is meaningfully stimulating,” said James Egelhoff, chief US economist at BNP Paribas Securities.
“Given stimulus-driven policies, strong cyclical impulses, and persistent inflation, we believe that significant rate hikes, perhaps more than the three we expect, may be needed to stabilize unemployment from below and prevent overheating next year,” he added.
Mr. Egelhoff agreed that Mr. Warsh’s “mass overnight” comment during his shortened press conference was “the most striking feature.”
The market is pricing in the possibility that the Warsh Fed will release several more doses before the end. Futures suggest the federal funds rate will be 4.635% near the end of 2027, which would require three or four more rate hikes.
If so, the Fed would at least undo many of the FOMC rate cuts approved under Warsh’s predecessor, Jerome Powell, who currently sits on the board.
Jack Janasiewicz, portfolio manager and lead portfolio strategist at Natixis Investment Managers Solutions, said the “a certain amount of easing” comment “seems to have helped emphasize this hawkish tone, suggesting that (the committee) no longer views policy as moderately restrictive.”
“We remain unconvinced that this is the beginning of an aggressive new tightening cycle,” he said. “Rather, we see this as an unwinding of the insurance cuts the Fed implemented in fall 2025.”
