Warsh Vows to Rein In Inflation as Trump Demands Rates Below 1%

US Enters 4% Interest-Rate Era for First Time in Three Years

South Korea Faces Mortgage-Loan Shock

Fed Raises Benchmark Rate by 0.25 Percentage Point

Warsh Tightens Policy Four Months Into Tenure

"Inflation Has Been Too High for Too Long"

Prospects Rise for Another Increase This Year

The Federal Reserve has moved to curb inflation that has stayed above its 2% target for more than five years. On September 16, the Fed raised its benchmark interest rate by 0.25 percentage point, the first increase in three years and two months. Chair Kevin Warsh and other Federal Open Market Committee members also signaled that another increase this year remains possible.

The Fed said policymakers unanimously agreed at the September 15-16 FOMC meeting to raise rates by a quarter point. That brought the federal funds target range to 3.75% to 4.0%.

The Fed cited inflation stuck in the 3% range and geopolitical uncertainty, including the war in the Middle East, as reasons for the move. It described the economy as resilient, with consumer spending firm, productivity growth strong, investment active and job gains keeping pace with labor-force growth. The message was that the economy can absorb higher borrowing costs.

In the dot plot released the same day, the median year-end rate projection from 18 officials excluding Warsh was 4.1%. That was up 0.3 percentage point from June. After the FOMC meeting, Warsh told reporters that inflation had been too high for too long and that financial conditions were still not restrictive. His remarks left the door open to another increase. On Wall Street, more analysts began calling for an additional move this year, saying the Fed's tightening push was stronger than expected.

Markets were rattled by the hawkish message but avoided major turmoil. The Dow Jones Industrial Average fell 1.2% in New York, while the S&P 500 and Nasdaq posted only modest declines. Yields on 10-year and 30-year Treasuries were little changed. South Korea's Kospi slipped 2.56 points, or 0.04%, on September 17. Short-term bond yields in both South Korea and the US, which are more sensitive to monetary policy, rose sharply.

All FOMC Members Backed Monetary Tightening as Strong Growth Fueled Inflation Concerns

Markets Viewed the Fed as More Hawkish Than Expected; Wall Street Bets Tightening Bias Extends Into Next Year

"The economy is doing well, but inflation is not coming under control."

That was the essence of Kevin Warsh's message at his September 16 FOMC press conference. Of the Fed's two mandates, employment and price stability, the labor market is stable enough for policymakers to focus on inflation. Warsh also called the rate increase an important step toward restoring price stability, underscoring why markets see a high chance of further increases.

Push for a Faster Return to Low Inflation

Before the FOMC meeting, expectations were that one or two members might oppose a rate increase. Instead, all members backed the 0.25 percentage-point move.

The Fed made clear that inflation's failure to slow enough was the main reason for the increase. Warsh used phrases such as "a timelier return" to the 2% inflation goal, underscoring his image as an inflation fighter. He said prices had stayed too high for too long and that financial conditions were not restrictive. Other FOMC members shared that view, he added.

Officials paid particular attention to price readings that have remained in the 3% range, including August personal consumption expenditures at 3.6%. Warsh said inflation data over the summer had not improved meaningfully and that the latest move removed part of the prior accommodative stance. He called it an important step. Goldman Sachs and Nomura interpreted those remarks as a key signal that more tightening may follow.

Strong Growth Is Adding to Price Pressures

According to the Summary of Economic Projections released by the Fed, officials raised their forecast for this year's gross domestic product growth to 2.3% from 2.2%, while lowering the unemployment-rate projection to 4.1% from 4.3%. For next year, GDP growth was revised up to 2.4% from 2.2%, and the unemployment-rate forecast was also cut to 4.1% from 4.3%.

At the same time, the Fed lifted its medium-term inflation outlook. It raised this year's core PCE forecast to 3.4% from 3.3%, and its 2028 forecast to 2.2% from 2.1%. Warsh said strong economic growth and job gains were adding to upward pressure on prices.

Warsh also struck an upbeat tone on the recent rise in the 10-year Treasury yield, a focal point for global markets. One reason long-term yields have climbed, he said, is that the economy is getting stronger. Those yields are moving to reflect the future, and he wants to let them move that way.

The strength of the economy also helps explain why markets did not react as violently as they did three years ago. In 2022, the Fed delivered aggressive rate increases after June consumer prices surged 9.1%, even as concerns lingered over the post-pandemic recovery. This time, even if the Fed raises rates again, markets do not expect a 2022-style "big step" of 0.5 percentage point.

How Long Will Rate Increases Continue?

Markets took both the FOMC decision and Warsh's comments as more hawkish than expected. Relatively steep declines in financial shares such as JPMorgan and Bank of America reflected concerns over a prolonged tightening cycle, analysts said.

The FOMC will meet two more times this year, on October 27-28 and December 8-9. On Wall Street, expectations for another increase this year are hardening. The dot plot showed a median year-end projection of 4.1% from 18 of the 19 officials, excluding Warsh. Only two projected no further change. Morgan Stanley said the Fed was signaling the possibility of an additional increase sooner rather than later. JPMorgan expects one more rate increase in December.

The possibility of further increases next year is also substantial. When the Fed starts raising rates, the cycle has often continued for an extended period. The Wall Street Journal said expectations that this would be a one-off move had weakened.

Hwang Jung-su, Korea Economic Daily correspondent in New York / Lee Sang-eun, Korea Economic Daily correspondent in Washington hjs@hankyung.com