What Kevin Warsh said about the Fed’s first rate hike since 2023

By Bryan Mena, CNN

Washington (CNN) — The Federal Reserve on Wednesday raised interest rates for the first time in more than three years in a renewed fight against inflation, which has picked up since early in the year due to the war with Iran.

Officials voted unanimously to raise their benchmark lending rate by a quarter point to a range of 3.75%-4%. That included Chairman Kevin Warsh himself, who was handpicked by President Donald Trump to lead America’s central bank.

The Fed’s conviction to raise rates underscores its concerns with inflation, which has been elevated for the last five years. A resilient labor market is also allowing the Fed to focus on inflation.

“Today’s policy action will support a timelier return to the Committee’s 2 percent goal,” officials wrote in their latest policy statement. Annual inflation, as measured by the Personal Consumption Expenditures price index, has trended closer to 4% than 2% in recent months.

In a post-meeting news conference, Warsh said three things changed since the Fed’s July meeting: The economy strengthened, inflation didn’t slow, and geopolitical tensions intensified. Those were the major reasons why he voted for a rate hike, he said.

“All three of those things helped themselves to a firm, unanimous decision today,” he said. He also stated repeatedly that inflation is the Fed’s top priority.

In new economic projections, officials penciled in another rate hike by year’s end, similar to Wall Street’s forecast, and that’s it. Officials don’t expect any further hikes in 2027. Warsh again did not submit projections at this meeting, part of his refusal to offer forward guidance, or estimates on the trajectory of interest rates.

Wednesday’s decision marks the first big move on interest rates under Warsh, who has repeatedly stated he is acting independently as the Fed’s leader. The rate hike could put him at odds with Trump, who appointed him after repeatedly pressuring the central bank to lower rates.

While taking questions from reporters, Warsh talked about inflation, the economic fallout of the Iran war, the bond market and the implications of AI on the US economy, among other things.

Here are key takeaways from the Fed’s decision to raise rates for the first time since July 2023.

Warsh on geopolitics

The Fed’s latest decision comes after months of a disruptive war in the Middle East that has roiled energy prices and threatens to make inflation more persistent and widespread. The Fed’s preferred inflation gauge for August is due later this month, but an estimate from the Cleveland Fed shows that it likely moved higher from August through early September.

“There is no hiding from hot spots around the world,” Warsh said. “Our judgment about what is the most likely, or least likely, of the geopolitical situation has changed.”

The Congressional Budget Office in a new estimate released this week said it expects the Iran war to jack up inflation by roughly 0.5 percentage point early next year, citing “inflationary pressures caused by the reduction in shipments of oil and natural gas through the Strait of Hormuz and disruptions to shipping through the Red Sea.”

The Fed’s latest policy statement also nodded to the uncertainty sparked by the Iran war, which still has no end in sight.

Warsh on Trump and Fed independence

When asked by a reporter what he made of Trump’s calls to lower borrowing costs, Warsh didn’t say if he agreed or not, but he did speak about the importance of the Fed’s political independence.

“I don’t have anything for you on discussions with the President, and I am not a Wall Street newsletter.” he said. “Part of the independence of the Federal Reserve is we stay in our lane. Independence is a two-way street.”

“We will let people that do trade policy and fiscal policy stay in their lane,” he said.

National Economic Council Director Kevin Hassett told CNN’s Jake Tapper on Wednesday that the president will accept the Fed’s latest rate hike.

The president posted later Wednesday on his social media platform: “LOWER THE INTEREST RATES FOR THE UNITED STATES OF AMERICA, AND FAST!” though he stopped short of criticizing Warsh.

Trump has recently rounded on the Fed’s influential Board of Governors, calling them “political” and “hostile.” The Fed’s rate decisions aren’t made by the board itself, but rather by a broader group at the central bank that includes the board.

Warsh on AI

Warsh made it clear that inflation is the Fed’s top priority, and there are worries about the potential inflationary impact of the massive AI build-out.

He didn’t delve into AI’s impact on prices, but he stated that business investment — a lot of it driven by AI — has been “robust,” as did the Fed’s policy statement.

In response to a question posed by CNN’s Matt Egan, Warsh said he has “spent a lot of time thinking about AI.”

“We care very much about what is happening in artificial intelligence. We care much about the implications on the demand side of the economy, and ultimately on the supply side of the economy,” he said. “I think it is so important, that we established a task force that should report by the end of the year to help us think about implications for future policy.”

One of the five task forces Warsh created is examining the potential economic impact of AI, which consists of Charles Jones, an economics professor at Stanford University, on leave at Anthropic; Asha Sharma, executive vice president and CEO of Microsoft’s Xbox; and Marc Andreessen, co-founder and general partner at the venture capital firm Andreessen Horowitz.

Warsh on the bond market

Investors remain on the lookout for any signal from the chairman that an aggressive rate-hiking cycle is on the horizon. In a major speech last month, Warsh only said that there’s more “work to do” in fighting inflation.

The bond market, meanwhile, has already started doing some of the Fed’s work for it, making borrowing more expensive even before any rate hike. The yield on the 10-year US Treasury, a key benchmark for borrowing costs, rose above 5% again on Wednesday, its highest closing level since 2007. That’s putting pressure on households and businesses.

Warsh said the the run-up in yields reflects three things: A stronger economy; geopolitics and more competition for capital.

“The economy is strengthening,” Warsh said. “The so-called hyperscalers are out in the market raising funding, so the competition for capital is real, and it partly explains the increase in yields.”

He reiterated that the Iran war has resulted in “hot spots around the world” and “what that means for products that find their way into a store across the country.”

Warsh on the strong economy

For now, the US economy seems to be in good shape.

Job growth picked up sharply in August, according to the Bureau of Labor Statistics, while the unemployment rate held steady at a relatively low 4.1%. Economic growth has also been on solid footing, though an increasing share of it has been driven by red-hot spending on AI. And new data on Wednesday showed that Americans stepped up their retail spending sharply last month, showing the Fed indeed has some room to raise rates.

The Fed’s pivot to rate hikes also implies central bankers believe the labor market is in a position to withstand tighter monetary policy. In addition to fighting inflation, the Fed is also responsible for keeping the labor market intact, but it’s never guaranteed the Fed won’t inadvertently tilt the economy into a recession whenever it raises rates. In the past, Fed chairs have willingly forced the economy into a recession if it meant getting inflation back under control.

Warsh framed Wednesday’s rate hike with a positive spin: The US economy is so strong it can handle some rate increases.

“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,” he said.

This story has been updated with additional developments.

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