Fed Pauses, but Warsh Risks Becoming a Paper Tiger

The Federal Reserve (Fed) held rates steady at its October meeting, taking a pause after September’s rate hike, which was the first hike in three years. But unlike September’s decision, this vote was not unanimous: two Federal Open Market Committee (FOMC) members dissented, both favoring an increase in the policy rate.

Key takeaways

The pause was about timing, not politics. It makes sense to me that the Fed would take a breather in October, especially since it is less than a week before the midterm elections. Chair Warsh was clear to point out that politics played no role in the decision. He described the period between now and the December meeting as an “information-rich interval” that will enable policymakers to have more data when they meet in December.

Warsh is upbeat on the US economy. He described it as strong, mentioning that GDP growth had been materially revised upward for the first half of 2026, and he anticipates even better growth in the second half.

"Monetary medicine” is starting to work, Warsh says. When asked why he didn’t raise rates given that there has been no progress toward the 2% inflation target since he took over the Fed, Warsh said the Fed has been working on it. He pointed to the new “monetary policy medicine” he has instituted, which includes doubling down on the 2% inflation target, taking responsibility for inflation being too high for so long, and laying out a framework for decision-making. He thinks it is starting to work.

Tough talk on inflation. Warsh insisted that the Fed is serious about bringing inflation back to target and that there is no soft inflation target.

A eye on productivity and measurement. Chair Warsh doesn’t believe the economy is running too hot and thinks that there has been an improvement in productivity – but he believes it has been imperfectly measured. He mentioned that the Fed’s Productivity and Jobs Task Force will be holding a conference on November 16^th to gather feedback from a broad range of participants. He said he would attend; I expect particular emphasis on AI-driven productivity as well as more accurate measures of productivity given his dissatisfaction with current measures.

The smaller details may matter, too. Warsh announced a change to the format for future meetings: 2027’s calendar will be comprised of seven rate-deciding meetings and one policy strategy meeting, while 2028 will have six rate-deciding meetings and two policy strategy meetings. He was also careful to refer to artificial intelligence (AI) as “super intelligence” (SI) at one point during the press conference; this is a minor detail, but it made me wonder if it could be a signal of a lack of complete independence for the Fed. And Fed Governor Lisa Cook, typically considered a monetary dove, was one of the two who voted to hike rates. That could increase the ire of the White House and cause it to step up its efforts to have her removed from her position.

Market reaction, looking ahead

The bond market took the decision largely in stride. The 10-year US Treasury yield finished the day at 5.021%, close to where it had started the day. The 30-year Treasury yield finished the day higher, remaining elevated at 5.347%, although slightly below the high it reached the day before.

Warsh seemed to have no sense of urgency. While harping on the fact that inflation has been above target for nearly six years, he seemed unmoved by the recent Consumer Price Index (CPI) and Producer Price Index (PPI) releases and instead wanted time to review the data. I expect a rate hike in December, but I am not convinced there will be significant tightening in 2027. I think Warsh runs the risk of being considered a ‘paper tiger’ if he talks tough on inflation but does not follow up with any actions.

And as I said after Warsh’s first three FOMC meetings, I believe his new, less transparent approach – including the absence of forward guidance and a shortened press conference – is likely to result in more confusion and market volatility, at least in the near term.