Fed Rate Meeting | Kevin Warsh FOMC Analysis

The FOMC held its federal funds target range at 3.75%–4%, a decision Kevin Warsh called right for the moment after a serious, sober discussion. The host described it as a hawkish hold and said markets still considered a quarter-point December hike highly likely. Warsh declined to endorse a fixed meeting date or a single data point as decisive, saying future decisions would depend on incoming information. Although he says he does not believe in signaling, the host noted that his remarks could still imply a policy direction. Warsh said politics and the midterm elections played no role in his decision or, in his view, his colleagues’ decisions.

Warsh described activity as expanding strongly: first-half GDP growth was revised up from 1.8% to 2.4%, third-quarter growth appeared likely to top 3%, and business investment was probably increasing at a double-digit pace. He cited lower unemployment than a year earlier, faster payroll growth than last year, and jobless claims at a generational low as signs of positive employment conditions. He said the economy was strong, but most colleagues did not judge it to be running too hot, and policy did not need to “throw people out of work.”

Inflation remains the central constraint. Warsh said it had been above the Fed’s 2% PCE objective for close to six years and that price stability had not been achieved; he rejected any softer or implicit target. Energy and related prices had risen again, and near-term inflation expectations had increased as households reacted to visible price increases, including at gas stations. Over longer horizons, most—but not all—measures show households, businesses, and markets expecting the Fed to deliver price stability. Warsh said the Fed was trying to stop sector-specific price changes from spreading, keep expectations anchored, and saw early but inconclusive signs that September’s removal of some accommodation was working.

Warsh said financial conditions had tightened somewhat since the previous meeting, which he viewed as policy working. He noted that some credit spreads had widened and that, since early September, markets had differentiated among technology and other investments. He rejected the idea that strong AI returns make the sector insensitive to rates, saying interest rates affect both AI investment and the broader economy. Recent data also suggest capital-expenditure strength is broadening beyond narrow AI-related activity. Productivity had improved for a couple of years, mostly before the current discussion of superintelligence; Warsh cautioned that faster growth alone does not establish that growth is causing inflation.

Warsh said colleagues overwhelmingly preferred waiting for greater clarity rather than reaching a firm policy conclusion, and he declined to say whether they still widely supported another hike that year. He does not favor forward guidance in ordinary times when the real economy is strong, though he credited it with helping during the 2008 financial crisis and said it could suit an exigent situation. The FOMC plans to keep eight meetings annually: one 2027 meeting will focus on strategy without a rate vote or policy statement, and Warsh expects two strategy meetings and six policy-setting meetings in 2028. Five task forces are examining topics including productivity and jobs, inflation, data, and the balance sheet. Balance-sheet recommendations are expected early in the first quarter, though timing is uncertain and changes are unlikely to materially affect the current policy setting.

The market outlook discussed on the episode was constructive but exposed to risks. Mike Wilson said midterms have historically offered a “clearing event” and an opportunity to add risk: since 1952, investors adding risk around midterms had positive returns over the following 6–12 months in every observed case, usually double-digit; the average S&P 500 return in the year after midterms was 17% in data going back to 1950. He warned that major events or broad, fear-driven pressure could break the pattern. Slower Fed balance-sheet growth and a 25-basis-point hike, with further hikes priced in, could push financial conditions toward levels last seen in 2018. Oil was near its highs, with uncertainty about US action toward Iran after the midterms cited as a continuing risk. SK Hynix’s record profit and planned $75 billion shareholder return were cited as evidence of chip-sector strength ahead of Alphabet and Microsoft results. In a poll of about 500 participants, 53% were bullish, 31% bearish, and 16% neutral; earnings, AI’s potential labor effects in 2027, and job-market strength were identified as key uncertainties.