September 18, 2026

The Fed raised the funds rate by 0.25% at the FOMC meeting this week to 3.75-4.0%.  It was almost inconceivable that they could do otherwise.  The only” forward guidance” that market participants needed was a clear indication from Fed Chair Warsh that the Fed was (finally) serious about bringing inflation back to the 2.0% mark.  When GDP growth for the third quarter seems likely to be at or above 3.5% and for the year about 2.4%, the unemployment rate at 4.1% is slightly below its full employment threshold, and the core personal consumption expenditures deflator is currently at 3.3% versus a 2.0% target, how could the Fed do anything other than raise the funds rate?  In our opinion the whole issue about “forward guidance” is overdone.  At each FOMC meeting the Fed will have the Board’s economic forecast as well as the views from each of the 12 Federal Reserve Bank presidents.  Nineteen people in that room will share their views.  If we replaced them with 19 private sector economists we would almost certainly come up with similar views about the economy, inflation, and interest rates.  We all look at the same data, and we would probably have the same wide range of forecasts for each of those variables, and different views regarding the future course of interest rates.  We do not need the Fed to spell it out for us.  We are quite capable of figuring it out on our own.

Fed Chair Warsh somehow thinks that by laying out a future path for interest rates that the Fed is somehow “locked in” to that scenario and will be slow to react if the situation changes.  Nonsense.  If you will recall, earlier in the year the Fed and the markets were expecting to see rate cuts during the course of this year.  But then the war broke out at the end of February, oil prices skyrocketed, and inflation began to accelerate.  The world changed and the outlook for the economy, inflation and interest rates changed as well.  But nobody was expecting the Fed to raise the funds rate  — until Fed Chair Warsh told us that the Fed was now serious about fighting inflation.  Given that tidbit of information it became evident that the Fed was going to raise rates in September.  The only guidance we needed was a sense of what was  important to the Fed.  Previously it seemed to be the labor market (which is why it eased several times late last year).  Now it is inflation.

With regard to the Fed’s outlook for next year it is remarkably similar to our own.  The economy grows at 2.3% pace, the labor market remains at full employment, and inflation subsides to a 2.3% pace which is beginning to approach the Fed’s 2.0% target.  But the Fed is not “locked in” to that forecast.  It depends crucially upon what happens with the war, oil prices and, ultimately, inflation.  To make such a forecast the Fed had to assume that the situation in the Mideast is going to calm down.  Perhaps the war does not “end”, but at least the fighting reverts back to occasional skirmishes and oil prices decline during the course of next year.  But is that a correct assumption?  Who knows.  None of us in the private sector knows.  The Fed does not know any more than the rest of us.  And, we suspect, President Trump does not know either.  If we and the Fed are wrong and full scale fighting returns, we will have oil prices and inflation skyrocketing and much more aggressive tightening by the Federal Reserve.    Is the Fed “locked in” to its current forecast?  No way.  It (and us) will adapt to a different scenario as necessary.

If Chair Warsh wants to give us less “forward guidance” so be it.  We will survive.  We figured it out this month without the Fed’s help and correctly concluded that the only thing the Fed could do was raise rates by one-quarter percentage point.  All of us – both inside and outside the Fed – will figure it out together.

There are a lot of balls in the air right now.  Probably at the top of the list is the war and  oil prices.  That would be followed by AI and whether we will surrender to a world run by robots by the end of the decade.  Then there are Trump’s tariffs.  What’s next?  Do foreign investors and manufacturers look outside the U.S. for what they need?  And what happens with the elections in November?  Does it matter?   Trump seems to do everything by executive order.  And what is a “neutral:” level for the funds rate?  Does the Fed need to tighten a little?  Or a lot?  To run a company, manage a portfolio, or run a central bank you need to make some assumptions about all of these things.  Most likely whatever you are thinking today will be different by spring.  So stay nimble.  Be willing (and able) to make changes on the fly.  And don’t look for help from the Fed.  But think positive thoughts.  It may not be as bad as you think.

Stephen Slifer

NumberNomics

Charleston, S.C.