The Federal Reserve raised the target range for the federal funds rate by 25 basis points to 3.75% to 4% on September 16, with Chairman Kevin Warsh saying resilient economic growth and a strong labor market give policymakers room to focus more aggressively on inflation.
The Federal Open Market Committee approved the increase unanimously by a 12-0 vote and said it will continue maintaining ample reserves in the banking system.
In his opening statement following the decision, Warsh said the U.S. economy appears to be strengthening rather than weakening, citing improvements in hiring, private-sector earnings and business capital investment.
Credit conditions have also remained robust, particularly for businesses. Warsh said he would be “hard-pressed” to characterize broad financial conditions as restrictive, a view he said was widely shared across the FOMC.
That assessment helps explain why the Fed was comfortable raising rates.
The central bank’s policy statement described economic activity as expanding at a solid pace despite elevated uncertainty partly linked to geopolitical developments. Domestic spending has remained resilient, productivity growth is strong, capital investment is robust and job gains have kept pace with growth in the workforce.
Warsh gave an even more optimistic assessment during the press conference.
He said the resilience of the U.S. economy amid geopolitical shocks had contributed to an atmosphere of optimism among FOMC participants during the two-day meeting.
The labor market remains an important part of that picture.
Warsh said unemployment is running at around 4.1%, while job openings and weekly hours have been increasing. Initial unemployment claims on a four-week moving average remain at levels he characterized as consistent with full employment.
He therefore described the employment side of the Fed’s congressional mandate as being in “good shape.”
Inflation, however, remains the central concern.
The Fed’s policy statement said inflation is still elevated and that the September rate increase is intended to support a more timely return to the central bank’s 2% goal.
Warsh was considerably more direct in his press conference.
He noted that inflation has remained above the Fed’s target for more than five years and said price stability has become the predominant focus of monetary policy because labor-market conditions remain healthy.
Warsh said recent inflation data have not convinced him that the underlying trend has improved enough.
Based on the latest Consumer Price Index and Producer Price Index readings, Warsh estimated that 12-month total Personal Consumption Expenditures inflation was approximately 3.6% in August.
Core PCE inflation was running at about 3.2%, while core CPI inflation was approximately 2.4%, according to the figures he cited.
He also pointed out that too many individual categories continue to record price increases above 3% on both six-month and 12-month measures.
Commodity prices are another concern.
Warsh said he had highlighted commodity inflation during his Jackson Hole remarks and noted that prices for many important inputs have risen during the period since the Fed’s previous meeting.
The September increase follows a period in which the Fed had chosen to wait for additional data.
Warsh said that at the July meeting, policymakers agreed inflation remained too high but a majority believed it was prudent to gather more information before acting.
At Jackson Hole, Warsh defined his threshold for further action as confidence that underlying inflation was clearly moving toward the Fed’s 2% objective at a sufficient pace.
The FOMC concluded at the September meeting that this threshold had not been satisfied.
The unanimous rate increase therefore represents an effort to prevent persistent inflation from becoming further embedded in expectations or financial markets.
Warsh said policymakers want to ensure that relative price increases in particular sectors do not broaden across the economy, that market-based inflation compensation remains low and that longer-term inflation expectations stay well anchored.
The Federal Reserve also released an updated Summary of Economic Projections.
Warsh said he again declined to submit an individual forecast, but summarized the median projections of other FOMC participants.
The median forecast calls for real GDP growth of 2.3% in 2026 and 2.4% in 2027.
Total PCE inflation is projected at 3.7% this year before declining to 2.3% next year, while the unemployment rate is expected to remain around 4.1%.
The rate projections are particularly notable.
The median FOMC participant expects the appropriate federal funds rate to be approximately 4.1% at the end of 2026 and to remain there through 2027.
With the new target range already at 3.75% to 4%, that median forecast suggests participants currently envision policy remaining around present levels rather than quickly reversing the September increase.
Warsh also said FOMC participants see inflation risks as tilted to the upside while risks to the labor market are approximately balanced.
That combination helps frame the Fed’s current policy stance.
Officials are not reacting to a collapsing labor market or a sharp economic slowdown. Instead, they see an economy that is continuing to expand, employment conditions that remain relatively healthy and inflation that is still running materially above target.
A higher federal funds rate can increase borrowing costs throughout the financial system, affecting credit cards, corporate borrowing, auto loans and other forms of financing. It can also increase returns available on certain savings and fixed-income products.
For businesses, the decision could make financing somewhat more expensive even as Warsh says credit availability remains robust.
For financial markets, the Fed’s economic projections and Warsh’s comments suggest policymakers are placing greater emphasis on the persistence of inflation than on concerns about near-term economic weakness.
The chairman also placed the decision in a broader international context, noting that many advanced economies are facing price pressures and that other central banks are making their own policy judgments based on their respective mandates.
Warsh closed his opening statement by emphasizing that the Fed sees stable prices as essential to sustaining the current economic expansion, particularly for lower-income households that stand to benefit from durable growth and a strong labor market.
The September increase therefore represents more than a routine quarter-point adjustment. It signals that the Fed believes the economy remains strong enough to withstand somewhat tighter monetary policy and that persistent inflation currently represents the more pressing risk to its mandate.
KEY QUOTES:
“Our decision comes at a time when the American economy appears to be strengthening. New hiring, private-sector earnings, business capital investment—each of these markers has improved in recent months and is pointing in a good direction.”
“The plain fact is that inflation is too high and has been for too long.”
“We must be confident that underlying inflation is moving to our objective, clearly and at sufficient speed. Today, the FOMC decided that this standard has not been satisfied.”
“The committee’s unanimous vote shows our resolve to achieve price stability on a timelier basis.”
“Those who are least well-off have the most to gain from a durable expansion, a solid labor market, and stable prices.”
Kevin Warsh, Chairman of the Federal Reserve
