A Quick Q & A On The Fed’s Rate Hike Today

It was the right move, but from a longer-term affordability perspective, there’s a good chance that interest rates will be higher for longer

As expected, this afternoon the Federal Reserve raised their benchmark interest rate by one-quarter of a percentage point. Let’s Q/A our way through the fine points.

Q: Why the hike?

A: Their decision to hike for the first time since 2023 was motivated by both economic and market rationales.

From an economic perspective, Chair Warsh underscored the “plain fact…that inflation is too high and has been for too long.” The data have exhausted their patience.

True, some economists, and some journalists questioning Warsh today, raised the correct point that if you believe that the inflationary pressures are mostly coming from tariffs and Trump’s Iran war , how does raising interest rates help? Won’t that just make life more expensive for borrowers, feed into other interest rates throughout the economy, and possibly ding overall growth, while inflation remains juiced by these Trumpian own-goal kicks?

But the committee—which voted unanimously for the hike—was not assuaged by such logic. For one, this “look-through-the-shocks” story has been told for years now, and inflation remains pretty high and pretty sticky. The FOMC’s (Fed Open Market Committee) forecast for the inflation gauge they track is 3.7% this year, 3.4% for the core, both of which are miles above their 2% target.

Second, it’s not solely pressure from tariffs and war. Inflation is also reflecting strong demand for AI-related equipment, and the AI boom continues to juice the stock market, which in spills over into consumer spending through “wealth effects.” So, some price pressures are, in fact, coming from the economy’s demand side, and interventions on that side of the economy are more in the Fed’s wheelhouse. In this regard, the extent to which Warsh was touting a strong growth story was interesting to me in ways I’ll get back to in a moment.

The market rationale for today’s hike derives from the +90% probability that the market put on this hike occurring. As I wrote earlier this week, there are times when the Fed might want to surprise the market, but this isn’t one of them. Bond investors especially have been looking for signs that the Fed would put some action behind their stated commitment to get inflation back to target, and today’s hike was already mostly priced into longer term debt, which was why you didn’t see much movement in those yields post-meeting (the 10-year ended the day up 1 basis point; the 30-year, down 2 bps).

Q: Isn’t this hike going to anger President Trump?

A: Sure, but remember, Warsh gets one vote like everyone else. The committee was leaning hard towards a hike and he would have looked pretty sock-puppety if he was seen as doing Trump’s bidding (especially if he argued for a rate cut, for which Trump has been calling).

This may be one reason why during his presser today he consistently emphasized the economy’s strength, even going further, talking about “an attitude of optimism” in the FOMC boardroom and arguing that there was “potential for even greater performance.” He didn’t say “the Trump economy is booming!” but he left it to one important, orange listener to fill that part in.

It seemed to have worked in the sense that when Trump did post disapprovingly about the Fed’s hike, he didn’t call out Warsh by name the way he would have with Powell. So, perhaps a grace period is in play…for now.

Q: So, is this hike a good thing, a bad thing? Will it impact regular folks?

A: I supported a hike because I believed the Fed needed to signal bond investors that the central bank was taking action against inflation, as discussed above. In this regard, the lack of long-term, bond-rate movements is good news against a counterfactual wherein the Fed surprised the markets and paused on rates. My guess is that would have pushed market interest rates up, which is the affordability-for-regular-folks connection here.

The fact that today’s rate hike was largely priced in supports this take, but what about expectations of future hikes? If markets think the Fed is turning more hawkish—which is what stock markets heard during the presser, leading to a big, late session selloff—wouldn’t that further push rates up?

In fact, the Fed signaled today that they might raise again this year. We’ll see, depending on the dataflow. But all of these gnarly details are a bit beside the point re the ongoing affordability pressures of higher mortgage rates, credit card rates, auto loans, bank loans, and so on.

The bigger story there is, I’m afraid, higher for longer. No one can be certain, of course; interest rates are very hard to predict. But my ample gut is telling me that we’re entering a period when rates will be elevated. The reasons range from our recessionary-level deficits in good economies, AI hyperscalers competing with the government for credit, and various premia on lending rates stemming from a deeply inept administration with a highly inflationary agenda and zero interest in what the data or opinion polls—or electoral polls—are saying about all that.

I’ll have more to say about this part of the interest-rate story in coming days.