Fed Shifts to High Gear Under Warsh

The Fed has entered a more proactive tightening cycle under Kevin Warsh, with further rate hikes possible but increasingly constrained by improving components of inflation.

• The Fed unanimously raised its policy rate in September 2026 to 3.75%-4%, the first increase since July 2023, lifting yields across fixed income.
• Inflation has remained above the Fed's 2% target for more than five years, while higher energy prices, solid employment and robust business investment gave policymakers room to tighten.
• The median dot-plot projection points to a mild hiking cycle, while Warsh did not participate in the forecasts because he prefers to avoid forward guidance.
• Warsh's Jackson Hole principles favor timely and actionable data, a firm 2% core-inflation target, short-term rates as the main policy tool and a more dynamic reaction function than Jerome Powell's gradual approach.
• Five task forces announced in June aim to modernize the Fed's operations, including through practices used in the private sector and a response better suited to an economy transformed by artificial intelligence.
• Further hikes could follow if inflation and activity remain firm, but continued disinflation in shelter and normalization in volatile services could support a slower path after October; a new PCE methodology due on September 30 is also expected by most economists to lower core PCE.

Takeaway: Higher-for-longer rates may keep longer-maturity Treasury yields elevated and create opportunities as well as risks for bond investors, strengthening the case for active fixed-income management while the Fed's future path remains data dependent.