Warsh Holds Rates and Leaves the Fed’s Hawks Waiting for December

A divided Federal Reserve held rates at 3.75% to 4% six days before the midterms, as Kevin Warsh argued September’s hike is working and two officials voted to tighten again now.

Key Takeaways

• The FOMC voted 10–2 to keep the federal funds range at 3.75% to 4%. Governor Lisa Cook and Cleveland Fed President Beth Hammack dissented in favor of an immediate quarter-point hike.
• Warsh said the committee’s overwhelming judgment is that its monetary medicine is starting to work. He still refused to call financial conditions tight or to offer any guidance on December.
• The 10-year yield held above 5% and traders priced roughly 22 basis points of tightening for December. Warsh also unveiled strategy-only FOMC meetings, with no rate vote, from 2027.

A Pause That Was Not Unanimous

The Federal Reserve held its benchmark rate on Wednesday, and the decision was the least interesting part of the afternoon. After two days of deliberation, the Federal Open Market Committee kept the target range for the federal funds rate at 3-3/4 to 4 percent. Going into the meeting, traders assigned about a 90% probability to a hold. What mattered was the vote. Ten members backed the pause, while Lisa D. Cook and Beth M. Hammack voted against it, preferring to raise the target range by 1/4 percentage point at this meeting. Six weeks earlier the same committee had voted 12–0 to raise the range to 3-3/4 to 4 percent, the first Fed rate increase since July 2023. Unanimity lasted exactly one meeting.

The overwhelming consensus is that what we’ve done in this monetary medicine is starting to work some, but there is no firm conclusions.

The statement reads like the work of a committee that has kept its diagnosis and changed only its timing. Economic activity moved from “expanding at a solid pace” to “expanding at a strong pace,” and the references to strong productivity and robust capital investment stayed in. September’s promise that policy would support “a timelier return to the Committee’s 2 percent goal” was dropped. In its place came a judgment that the accumulation of more information will help the Committee determine the appropriate policy stance. One sentence survived untouched, and it may be the most important in the document: “The Committee will deliver price stability.” A committee that keeps that line through a pause usually intends to act again.

The Chair’s Argument for Waiting

Warsh, sworn in as chair on May 22, 2026, was presiding over his fourth meeting. The first question was the obvious one: with inflation too high and the economy growing robustly, why not raise rates today? He emphasized that he sees controlling inflation as a gradual process. The committee, he said, chose to “take stock of where we are, evaluate what we’re seeing out the window” and to ask whether the weeks ahead would bring more clarity. Its answer was yes. In his telling, the overwhelming consensus is that this “monetary medicine is starting to work some”, though he added that no firm conclusions had been reached. As evidence, he pointed to inflation compensation as measured by swaps going the right way, and he described September’s move as removing a dose of accommodation.

What he would not say told as much as what he did. Credit conditions, he acknowledged, have tightened for some households and businesses. He still refused the conclusion some in the market wanted, saying he was “unwilling and unable to call financial conditions tight”. A chair who will not call conditions tight has left himself room to tighten them. On December he offered nothing, which fits a man who has long opposed forward guidance and who did not submit forecasts to last month’s Summary of Economic Projections. The silence is deliberate. Warsh wants the data, rather than the podium, to set expectations.

An Energy Shock Meets a Soft Labor Market

The dissents have an obvious source. The consumer price index rose 0.6 percent in September and 3.7 percent over the year, according to the Bureau of Labor Statistics. Gasoline climbed 9.1 percent, accounting for over half of the monthly increase, and the energy index is up 20.4 percent over 12 months. Core inflation was calmer, but it rose 0.3 percent for a second consecutive month and 2.6 percent over the year, up from 2.4 percent. That is the pattern hawks look for when an energy shock starts to spread into everything else. Warsh noted that energy and related prices have moved higher again in recent weeks and said the Fed’s job is to make sure inflation doesn’t broaden out. Americans, he observed, have lived with inflation running above the committee’s objective for close to six years.

I’m unwilling and unable to call financial conditions tight.

The labor market makes the case for urgency harder to argue. Payrolls rose by just 29,000 in September and the unemployment rate stood at 4.2 percent, numbers that would normally counsel caution. Warsh still called labor market conditions “quite positive” and said third-quarter GDP is likely above 3%, led by healthy consumer spending, with business investment likely rising at a double-digit pace. Soft hiring next to strong output and heavy capital spending fits the productivity story the committee keeps telling. It also puts unusual weight on the next releases. The advance estimate of third-quarter GDP and September personal income and outlays arrive on October 29, and October CPI is scheduled for November 10, four weeks before the Dec. 8–9 meeting.

Markets Hear a Deferral, Not a Pivot

Investors spent the afternoon working out what they had heard. Stocks dipped after the 2 p.m. statement, rallied as Warsh spoke, then gave back much of that. At 3:09 p.m. Eastern, the S&P 500 was up 0.07%, the Dow 0.04%, and the Nasdaq down 0.04%. Beneath the indexes, chip stocks did most of the lifting while the equal-weighted S&P 500 and small caps were in the red, a split that shows how unevenly higher rates are felt. History offered little comfort. The S&P 500 hasn’t closed higher on a Fed decision day since the last rate cut in December 2025, and in July it dropped 1.52% on decision day as the 30-year yield hit its highest level since 2007.

The bond market spoke more plainly. The 10-year yield rose 5 basis points to 5.04%, and the 30-year was up 2 basis points to 5.33%. The dollar slipped as Warsh suggested the one hike has worked or is working, but December pricing hardly moved: 22 basis points were priced in for the December 9 meeting, and Bloomberg reported bond traders pricing roughly a 90% probability of a December hike. Further out, traders see the policy rate climbing to nearly 4.7% by September 2027, about three more quarter-point hikes. Borrowers already feel it, with the average 30-year fixed mortgage at 7.33%. The bigger test comes after the close, when Microsoft and Alphabet report. With Amazon reporting Thursday, the three are aiming to spend as much as $600 billion in capital expenditures this year. That is the investment wave the Fed’s own statement calls robust.

Fewer Votes, Higher Stakes

Warsh also used the podium for the largest institutional change of his tenure so far. The FOMC will still meet eight times a year, but one 2027 meeting will be devoted to strategy, and in 2028 there will be two, leaving six policy-setting meetings. The strategy sessions will carry no vote on monetary policy and no policy statement. Warsh argued that the committee must set aside time “for thinking anew about big questions, looking out over longer time horizons”, and called the calendar “an institutional choice” rather than an administrative detail. The idea has been coming for a while: he first proposed fewer policy meetings in July, so that more data could build up between them.

Politics played no role in the decision,” Warsh stated. “I just spent two days with my colleagues upstairs. I didn’t hear an utterance about politics.

The reform fits a chair who has steadily cut back the Fed’s running commentary. He submits no personal projections, gives no guidance, and will now offer fewer occasions when markets can expect a move. It also raises the stakes of each remaining decision, starting with December. That meeting brings fresh projections, two more months of inflation data and a committee whose hawks have already broken ranks. Wednesday’s case for patience rests on one idea: another round of evidence is worth more than another quarter point today. If October’s figures show energy costs moving into core prices, the same logic will take Warsh to the hike Cook and Hammack wanted now. If they do not, the pause will look like discipline rather than delay.