Yesterday's press conference featured three words and a single answer—the entire Wall Street is pondering "Wash's approach."

At yesterday's press conference following the rate hike, Federal Reserve Chairman Warsh defined the nature of the hike with the three words "dose of accommodation." When pressed about the position of the interest rate relative to the neutral rate, his response was equally intriguing: the concept "is academically useful," but "has no operational effect on our decision today."

Three words and a sentence in response are forcing Wall Street to rethink the Fed’s rate hike path and policy framework.

In Warsh's framework, even after the target range was raised to 3.75%-4%, the policy stance remained stimulative—the rate hike was merely a withdrawal of one of those measures. Meanwhile, the neutral interest rate—the Fed's core anchor for judging policy easing over the past decade—was shelved from an operational perspective.

CME FedWatch data shows that the probability of another rate hike in October has jumped from 42% a week ago to about 58%. Goldman Sachs and Bank of America have both increased their rate hike expectations, with Bank of America also predicting another hike in December. Futures imply a year-end interest rate of 4.635% at the end of 2027, pointing to three to four more rate hikes.

"Dose of Accommodation": The interest rate hike merely removed a dose of easing.

Warsh repeated this statement multiple times at the press conference, pointing out that the basis for the decision to raise interest rates was that the US economy appeared to have "strengthened" and financial conditions had become less tight.

Krishna Guha, head of economics and central bank strategy at Evercore ISI, described this as the "most prominent hawkish element" of the press conference in a client report. "This wasn't a slip of the tongue. He repeated it multiple times, clearly after careful consideration," Guha wrote. "This framework is substantially different from the wording used by the Fed in recent years, suggesting that the number of rate hikes may be open-ended."

James Egelhof, chief U.S. economist at BNP Paribas Securities, explained: In the Federal Reserve's dictionary, "accommodation" is synonymous with "stimulus." "This means the current monetary policy stance is significantly stimulative. Given a stimulative policy start, strong cyclical momentum, and persistent inflation, significant interest rate hikes—perhaps more than three as we anticipate—may be necessary to stabilize unemployment and prevent the economy from overheating next year."

If we interpret Warsh's framework literally—as Guha further points out—"interest rates may have to continue rising until the financial conditions facing the private sector are no longer 'loose'—by any definition. That's a fairly open-ended prospect."

Neutral interest rate out, monetarism in the spotlight

During the press conference, CNBC reporter Steve Liesman pressed for details on how far the current interest rate is from the neutral rate (r*).

Walsh said he studied the neutral interest rate, or the "Wicksellian real rate" named after the Swedish economist Wicksell, as an economics student. He said the concept "is academically useful, helping us think about policy discussions," but "has no operational effect on the decisions we make today."

This statement needs to be understood within its context. Since the Bernanke era, the neutral interest rate has been the core benchmark for the Federal Reserve's policy-making—interest rates above the neutral level indicate tightening, and below indicate easing, and policy discussions revolve around this invisible benchmark. Warsh's characterization of it as purely academic discussion is tantamount to dismantling this positioning system that has been in operation for over a decade.

Some analysts point out that Warsh is pulling the Federal Reserve's decision-making logic toward monetarism, calling it a "seismic shift." His predecessor, Powell—who remains on the FOMC as a governor—has repeatedly and explicitly rejected the basic principles of monetarism. Warsh, however, had already outlined this direction at the Jackson Hole conference in August, suggesting a link between changes in the money supply and economic activity and inflation.

This press conference further confirmed this approach. Warsh clarified several positions highly consistent with monetarism: individual price changes in food, energy, etc., do not "cause" inflation, and the Fed must ensure that these relative price changes do not produce second- or third-order effects; individual data points are "noisy," and trends are important; the Fed deals with aggregate issues—the labor market, GDP, total spending, and overall inflation—but he also acknowledged that the lowest-income groups without financial assets and living on wages will benefit the most from price stability.

Money supply data has provided clues. Warsh stated at least twice during the press conference that he found it difficult to describe financial conditions as "tight" in recent months. Analysis indicates that the growth rate of broad money supply in the US has remained in the 6%-8% range over the past six to nine months, which is significantly too high—to achieve the 2% inflation target, this growth rate needs to be reduced to around 6%. Compared to the abstract and unobservable neutral interest rate, money supply growth provides a more direct basis for policy judgment.

What is Wall Street pricing?

Jack Janasiewicz, chief portfolio strategist at Natixis Investment Managers, believes the phrase "dose of accommodation" "reinforces the hawkish tone, suggesting the committee no longer considers policy to be moderately tight," but he "does not believe this is the start of a radical new tightening cycle," and is more inclined to interpret it as "withdrawing the insurance rate cuts the Fed plans to implement in the fall of 2025."

If futures pricing materializes, Warsh's Fed will at least reverse most of the rate cuts approved under his predecessor, Powell. However, the current focus of disagreement has moved beyond the number of rate hikes themselves—with the neutral interest rate exiting operational mode and money supply taking center stage, the market needs to adapt to a completely new policy framework. After three press conferences, Warsh outlined his framework, but he didn't provide an answer as to where the rate hikes would end.

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