Inflation Forces the Fed’s Hand

Ryan Knutson (0:07)

Yesterday, our colleague Nick Timiraos walked into a place he knows well, the press briefing room at the Federal Reserve.

Nick Timiraos (0:19)

So I walked into the room, my seat was in the back yesterday.

They had instructed all of the reporters beforehand, you know, ask one question, no follow-ups. The questions were short, the answers were short.

Ryan Knutson (0:37)

Nick was there to hear from Kevin Warsh, who took over as Fed Chair in May.

Nick Timiraos (0:44)

Having a new Fed Chairman, it's a little bit like we just started a new school year, right? It's a little bit like having a new teacher. Everybody's trying to figure out, well, what's this guy or gal like? How are they going to respond to this kind of question or that kind of question?

Ryan Knutson (1:03)

And what's the headline? What happened yesterday at the Fed?

Nick Timiraos (1:06)

The Fed raised rates for the first time in three years.

Kevin Warsh (1:11)

Good day. In the meeting just concluded, the FOMC decided to raise the target range for the federal funds rate by a quarter of a percentage point to three and three quarters to four percent in support of the Federal Reserve's dual mandate.

Ryan Knutson (1:29)

This is kind of a big deal.

Nick Timiraos (1:31)

Raising interest rates is a big deal because it takes a certain amount of evidence and confidence to say we need to change direction.

Kevin Warsh (1:42)

The plain fact is that inflation is too high and has been for too long.

Nick Timiraos (1:50)

We had been cutting. We stopped cutting. That was a change and now we're actually going to raise interest rates.

It's especially a big deal doing it now, two months before the midterm elections, doing it when the White House has been saying inflation's under control, these high prices are going to go back down really soon. The Fed's saying, maybe not.

Ryan Knutson (2:18)

With the recent turmoil in the bond market and yesterday's interest rate increase, the cost of borrowing will go up throughout the economy.

Mortgage rates, car loans, any balance you might have on your credit card, it'll all be more expensive. Nick, I thought we were supposed to be done raising rates and it feels like we're now at yet another pivotal inflection point where the economy is not looking like it's moving in the right direction.

Nick Timiraos (2:45)

Yeah, if you went back to the beginning of the year and said the Fed's going to be raising interest rates just a few months after Donald Trump gets his new chairman, I'd have said no way. But if you had been following anything in the last couple of months, it wasn't a big surprise at all.

Ryan Knutson (3:06)

Welcome to The Journal, our show about money, business, and power. I'm Ryan Knutson. It's Thursday, September 17th.

Coming up on the show, why the Fed chair who was supposed to lower rates.

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Ryan Knutson (4:11)

When President Trump selected Kevin Warsh to replace Jerome Powell as Fed Chair in January, the Fed had been in a period of cutting interest rates. Inflation was coming down and the economy was looking more stable.

Nick Timiraos (4:23)

At that time, investors said, OK, we think we're going to get more interest rate cuts now. The idea was that once Powell's term ended in May and Kevin Warsh came in, it would open the door to a looser policy, because that's what Trump wanted and that's what Kevin Warsh had signaled.

Ryan Knutson (4:42)

But within weeks of Trump's decision to tap Warsh, the economy was hit with a massive shock.

SPEAKER_5 (4:50)

We have breaking news that we're following from overnight. The US and Israel have launched a wide scale assault on Iran.

SPEAKER_6 (4:56)

The Pentagon today announcing it's sending more troops and fighter jets to join the operation.

Nick Timiraos (5:02)

When the US bombing campaign began in Iran, not too many people realized at the time how that was going to change everything in 2026

Ryan Knutson (5:12)

When Iran closed the Strait of Hormuz, oil prices spiked, raising costs for businesses and consumers across the economy.