"Hawkish Rate Hike!" A Dramatic Change at Walsh
On September 17, the Federal Reserve unanimously approved a 25 basis point rate hike at its FOMC meeting, raising the target range for the federal funds rate to 3.75%-4.00%. This was a hawkish rate hike that was consistent with its words: Chairman Warsh's remarks at the press conference were completely in line with the hawkish tone he had set at the Jackson Hole conference.
According to TrendFocus, UBS immediately released a report interpreting the rate hike. The report indicated that Warsh repeatedly emphasized at the post-meeting press conference that current financial conditions "do not constitute a constraint," and that the rate hike merely removed "a dose of accommodation," a much stronger wording than the market expected.
Price stability is the foundation of economic growth, and I think we've taken a significant step toward achieving it today. We've done this in part by removing this dose of easing.
Warsh explicitly refused to assign any "operational significance" to the neutral interest rate, indicating that his policy framework has diverged from that of his predecessor. The dot plot shows that the median forecast of FOMC members is for one more rate hike this year, and that the median interest rate of 4.1% will be maintained throughout 2027.
UBS economist Jonathan Pingle and his team assess that Warsh's policy response function has undergone a substantial shift compared to the past three or more Federal Reserve chairs: it is more sensitive to financial conditions, less sensitive to the impact of the labor market, and sets a higher threshold for "restrictive monetary policy." This assessment will have a direct impact on market expectations over the next four years.
Three major variables led to a "firm and consistent" decision.
At the press conference, Warsh revealed three new variables that have influenced decision-making since July, and dissected the logical support for this interest rate hike one by one.
First , the labor market is strong, as strongly confirmed by the August jobs report.
Second , the inflation trend is worrying, and recent CPI data has failed to provide a positive signal.
Third , the geopolitical situation and its impact on energy prices.
Walsh said in his own words: " The third thing that changed in seven weeks was geopolitics. Hotspots around the world have nowhere to hide , and our assessment of the most likely or least likely geopolitical trajectory has changed. All three points point to this firm and consistent decision today."
He also specifically mentioned that he has had numerous exchanges with other global central bank governors since taking office—something uncommon in the Fed's previous decision-making framework. Analysts point out that Warsh may be paying more attention to policy dialogues between global central banks than his predecessor.
"Not harming the labor market," but Walsh's logic is different.
Walsh stated at the meeting: "I don't think we need to harm the labor market to achieve our goals. I don't think the two components of our dual mandate—price stability and full employment—are mutually exclusive in the medium term."
This statement sounds mild, but the report interprets it quite the opposite.
According to research reports, this is not the conventional logic of "the labor market looks good, but inflation is too high," but rather Warsh's view that higher interest rates will not substantially impact employment expansion. His tolerance—or rather, indifference—to labor market shocks constitutes one of the core characteristics of his policy framework.
In other words, Walsh wasn't saying "I will carefully protect jobs," but rather "Raising interest rates won't hurt jobs, so I have no reason not to."
Sensitivity to supply shocks: a new policy signal
Analysts also specifically pointed out that Warsh appears to be more sensitive to energy price shocks than his predecessor.
This may stem from his critical reflection on the Federal Reserve's mishandling of the COVID-19 pandemic. Historically, including within the Fed during 2007-2008, there was a view that the response to rising oil prices should be "looked through," because the energy shock would eventually subside on its own. Warsh, when he was a Fed governor, had previously expressed sympathy for the positions of Charles Plosser and Richard Fisher, who focused on the secondary effects of oil price inflation.
Now as chairman, his stance has shifted. Warsh mentioned "second-round effects" at the meeting—a term closer to the European Central Bank's policy language than the Federal Reserve's traditional framework of "energy price transmission of inflation."
This means that Warsh tends to take proactive measures in the face of supply shocks to bring inflation back to the target , rather than waiting for the shock to subside naturally before making adjustments.
Therefore, according to the report analysis, compared with the previous chairman, Walsh's reaction function exhibits three significant characteristics:
First, he is more sensitive to financial conditions. He pays more attention to the market than his predecessor, but in the opposite direction—he shows obvious indifference to market downturns, ignoring them entirely in his Jackson Hole speech and showing no concern at today's press conference.
Second, it is less sensitive to the labor market. His dual mandate statement effectively downplays the binding force of employment on monetary policy.
Third, the threshold for "restrictive policies" is higher. He refuses to acknowledge that the current interest rate level is restrictive, which means he is willing to push interest rates higher and maintain them for longer.
UBS concluded:
Overall, compared to the past four decades, we may be facing a more hawkish FOMC response function, and this state will continue for the next four years.
Dot plot: Write down low interest rates, but act according to high interest rates.
This dot matrix chart reveals an intriguing internal contradiction.
The median forecast indicates that the FOMC will raise the longer-run dot of the interest rate from 3.1% to 3.2%. However, the actual interest rate path written by the committee members—maintaining 4.1% in 2027, falling to 3.9% in 2028, and then further to 3.6% in 2029—means that the nominal policy rate will remain above this long-run dot throughout the forecast period.
This indicates that "the FOMC is actually operating at a level higher than its nominal long-term equilibrium interest rate," meaning that the committee members believe, deep down, that a higher level of real interest rates is needed to achieve price stability over the next three to four years.
Furthermore, Walsh himself again did not submit a dot plot —only 17 of the 18 data points extend beyond 2027. Analysts believe that "clearly one participant felt that predictions three years from now had little practical value."
Regarding SEP inflation forecasts, the core PCE inflation forecast for this year has been revised upward from 3.3% to 3.4%, slightly exceeding UBS's expectations; however, the path over the next three years remains consistent with the return to the 2% target. It is worth noting that despite the significant upward revision of interest rate forecasts, GDP growth forecasts have also been revised upward—from 2.2% to 2.3% in 2026, while the unemployment rate forecast has been significantly lowered from 4.3% to 4.1%, and is expected to remain below the long-run equilibrium level of 4.2% throughout the forecast period.
UBS's interest rate path forecast
According to a UBS research report, its baseline forecast is as follows:
- October FOMC : Skip rate hike (consistent with the wait-and-see approach in June-July 2026, while also avoiding a rate hike six days before the midterm elections)
- December FOMC : Another 25 basis point rate hike
- 2027 : No change, interest rate cuts begin in June.
However, the bank made it clear that following today's press conference, the risks to this interest rate path are significantly tilted to the upside .
Walsh's attitude toward the forward guidance was also quite straightforward at the press conference:
My role is not to provide forward guidance, but my commitment in June was to reaffirm to the American people, to all who are listening, that we will achieve price stability… Today’s actions begin to show that we are serious, that we will deliver on our price stability goals, and, as the statement says, that we will do so in a more timely manner.
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