After Warsh’s strong start, how high will rates need to go?

 Financial Times Europe 18 Sep 2026 Michael Strain The writer is an FT con trib ut ing editor and dir ector of eco nomic policy stud ies at the Amer ican Enter prise Insti tute

 Since tak ing office in May, Fed eral Reserve chair Kevin Warsh has said all the right things about the Fed’s fail ure — span ning over five years — to bring infla tion back to its 2 per cent tar get. This week, the rate-set ting com mit tee backed up those words by increas ing its policy interest rate by a quarter point to 3.75 to 4 per cent. The Warsh Fed is off to a strong start. Warsh and his col leagues voted unan im ously to increase the fed eral funds rate — the first increase since July 2023, when the cent ral bank aggress ively raised rates in its delayed response to the 2021 infla tion surge. Moreover, the com mit tee indic ated that more increases are com ing. Of the 18 Fed offi cials who sub mit ted fore casts, 16 expect at least one addi tional quarter-point increase in 2026. Just seven weeks ago, the com mit tee voted against a rate hike. The August data seems to have had a sur pris ingly large impact on the Fed’s infla tion out look, offer ing some sup port for the view that dis in fla tion had set in over the sum mer. But Warsh was right in his Jack son Hole speech to cau tion against rely ing “on isol ated data points”. “Trends mat ter most,” he argued. And the infla tion trends are troub ling. As meas ured by the core per sonal con sump tion expendit ures price index, infla tion has been trend ing upward for more than a year. In July 2025, by this meas ure, infla tion was 2.9 per cent. In July 2026, the most recent month data are avail able, infla tion was 3.3 per cent. Of course, some of this is due to factors that higher interest rates will not affect, like tar iffs and pass-through from higher energy prices from the war in Iran. But the meas ure of infla tion I prefer does not include goods (which are affected by tar iffs) or energy prices. It also shows an upward trend in infla tion for more than a year. I share Warsh’s broader eco nomic out look. The unem ploy ment rate was lower in August 2026 than it was in August 2025 or August 2024. Although long yields on gov ern ment debt have been increas ing, over all fin an cial con di tions do not appear to be restrict ive. Under ly ing growth is healthy. The Atlanta Fed fore casts annu al ised cur rent-quarter GDP growth of 5.1 per cent.

How high, then, do rates need to go? It is instruct ive to con sider the first half of 2025, when the effect ive funds rate was at roughly 4.3 per cent — evid ently not high enough to gen er ate dis in fla tion, to cause a wor ry ing soften ing in the labour mar ket, to pre vent eco nomic growth from accel er at ing or to restrain an increase in stock prices. This week, the Warsh Fed undid one of the three mis taken 2025 rate cuts. I expect an addi tional rate increase this year will be needed. The chair’s post-meet ing press con fer ence high lighted two fun da mental ques tions. Warsh char ac ter ised the Fed’s decision as remov ing “a dose of accom mod a tion”. This implies that he is using a long-estab lished mon et ary policy frame work — that there is a level of the funds rate below which the Fed is sup port ing eco nomic demand and above which it is restrain ing demand. But in the press con fer ence, Warsh rejec ted that frame work, dis miss ing it as an inter est ing aca demic exer cise with no “oper a tional effect on decisions” the Fed makes. He will need to explain how he will cal ib rate the funds rate in the absence of this. Second, Warsh argued that he does not believe there is a trade-off between stable infla tion and full employ ment. In the short term, this view has major implic a tions for mon et ary policy. If dis in fla tion does not come from increas ing eco nomic slack, then does Warsh think it is entirely driven by infla tion expect a tions? If short-term demand can be increased without infla tion, then does he think that infla tion in 2021 was largely unaf fected by that year’s massive fiscal stim u lus? Still, Warsh has shown that he has steel in his spine by increas ing interest rates seven weeks before the midterm elec tions. Cent ral bank inde pend ence is cru cial for price sta bil ity, which in turn is cru cial for long-term prosper ity. Don- ald Trump is the greatest threat to Fed inde pend ence in mod ern his tory, going so far as to weapon ise the crim inal jus- tice sys tem against Fed offi cials in order to bend the com mit tee to his desire for lower interest rates. Warsh is now stew ard of this vitally import ant found a tion of prosper ity. Some Repub lic ans, includ ing the pres id ent, may absurdly assign par tial blame for any com ing midterm losses to the Fed’s decision, mak ing the hard job of pro tect ing its inde pend ence all the more chal len ging. Warsh has shown he is up to the job.