Interest rate hike a 'reassuring' sign Fed is acting independently, economist says

Geoff Bennett:

It's the first major move by Fed Chair Kevin Warsh to combat elevated inflation. President Trump has long pressured the Central Bank and Warsh's predecessor to lower interest rates.

But, Warsh, who is four months into the job after being handpicked by Mr. Trump to lead the Fed, explained why the committee voted unanimously to raise rates today.

Kevin Warsh, Federal Reserve Chairman:

The least well-off are the ones who have the most to gain from stable prices. The decision we made today was the right decision to deliver on the remit that Congress gave us to ensure stable prices.

Moreover, I would say, because of the underlying strength of the economy, because we are, as I mentioned, largely acting consistent with full employment, we can be focused on stable prices. Some months ago, I said we will deliver stable prices. Today's action is consistent with that.

Geoff Bennett:

And for more, we're joined now by Julia Coronado, an economist at the University of Texas at Austin, who runs her own firm called MacroPolicy Perspectives.

Welcome back to the program.

Julia Coronado, MacroPolicy Perspectives:

Thank you for having me.

Geoff Bennett:

So what does this first decision by the Fed under Warsh's leadership tell us about Warsh as a Fed chair committed to fighting inflation and as a Fed chair who is willing to operate independently of the president who appointed him?

Julia Coronado:

Yes, it's it's a pretty quick turnaround for an official who was nominated presumably to bring rates down to turn around and hike rates by September.

And I think that reflects the data he's facing and the committee he has to manage. So the committee is looking at the data, and as Warsh, Chair Warsh, described, unemployment is low, inflation is high. That's a pretty simple formula for Central Bankers.

There was a lot of support. It was a unanimous decision, and most officials think that it's not the last of the rate hikes. So more lie ahead.

Geoff Bennett:

So bring this down to the household level. What gets more expensive and how quickly?

Julia Coronado:

Well, we've already seen longer-term interest rates back up.

Over the last month or so, we've seen a tremendous rise in borrowing costs, reflecting expectations that the Fed would need to raise rates, reflecting some of the geopolitical tensions we're seeing ripple through the commodities markets, and the inflation data itself just showing a lot of persistence.

So, in a sense, the borrowing costs consumers face have already increased. Mortgage rates are a lot higher. Auto loan rates are likely going to rise as well. So it's really -- I think you mentioned this is really about the Fed following through and the new Fed chair demonstrating that he is independent of politics and will do what the data, what the economy says is necessary.

And I think that's -- in a sense, that's reassuring that the Fed is acting independently.

Geoff Bennett:

On those borrowing costs that you mentioned, the 10-year Treasury has now passed 5 percent. How much does that complicate what the Fed is trying to do here?

Julia Coronado:

Well, it actually is a reflection of what the Fed is trying to do, which is to slow the economy down, in a sense.

It's an unusual picture because the economy is being driven by this enormous A.I. build-out, rather than the typical hot labor market, hot consumer spending. We're in the middle of a huge CapEx boom, and that demand for capital is part of the reason interest rates are higher.

And so it sort of sows the seeds of its own slowdown. They -- there's a lot of borrowing being done by the tech companies, the hyperscalers. That's putting a lot of demand for money, and that's driving up the price of money, and that in turn could slow down that build-out.

Geoff Bennett:

Returning to what you said a minute ago, how most Fed policy watchers expect another rate hike, what would have to change for that not to happen?

Julia Coronado:

I think we'd have to see.

I mean, one of the reasons that Chair Warsh cited for moving today was the resilience in the economy. The economy just has absorbed blow after blow from tariffs and wars and a lot of disruption, and the unemployment rate is at 4.1 percent, which is very low.

So I think what we would have to see are signs of wobbles in the economy, signs of vulnerability, a labor market where unemployment is on the rise again, or some pretty noticeable cooling off in geopolitical tensions and pipeline inflation pressures and in the inflation data itself.

And neither of those is the most likely scenario in the near future. So most of the officials who wrote down a forecast today, the vast majority think that we will see another rate hike before year end, likely at the December meeting.

Geoff Bennett:

Yes.

And Warsh has promised a different approach to how the Fed communicates. What did you hear from him today in terms of his language, his tone, or what he chose not to say that tells us how he intends to run the Fed differently?

Julia Coronado:

Yes, so there was a couple of differences.

One, he sort of noted that, while decisions have sometimes been made down to the last minute on high-frequency data, that the Fed is waiting and then they make a decision based on sort of one month of data, or that's the perception, that he is going to be stepping back and looking at underlying trends more. So that's one difference.

A second difference is that, in the past, when we the Fed thought it was embarking on maybe a sequence of rate hikes, they would kind of telegraph that at the press conference. Prior chairs would say that they think a sequence of moves is likely. Chair Warsh steered clear of that specific kind of guidance, although he did say -- it's very hard not to provide any forward guidance.

He did say that today's action is the start of the Fed demonstrating that they're going to make good on their inflation target. So the start of something suggests that, yes, more rate hikes probably lie ahead.

Geoff Bennett:

Julia Coronado, always great to speak with you. Thanks for making time for us.

Julia Coronado:

My pleasure.