Why the Federal Reserve Raised Interest Rates

SPEAKER_1 (0:02)

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John Authers (0:08)

A lot of people thought that he would try to balance what the bond market was asking of him and what the president was asking of him by implying that he was just going to hike the once, that this was one and done. It seems that he has dealt with that issue and maintained his credibility in many important ways by, yeah, he's given us a rationale for he's really quite comfortable hiking and without absolutely pre-committing to it, making it pretty clear that he's prepared to go further.

David Gura (0:44)

I'm David Gura and this is the Big Take from Bloomberg News. Today on the show, the Federal Reserve raises rates by 25 basis points unanimously in the face of elevated inflation and elevated uncertainty.

Bloomberg Opinion's John Authers is with me, along with Maria Eloisa Capurro, who covers the Fed for Bloomberg News. And the three of us are going to dig into the Fed's latest rate hike, the market reaction and the political fallout.

Kevin Warsh (1:17)

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

David Gura (1:23)

John, you wrote earlier this week that Kevin Warsh kind of walked into a rates trap.

John Authers (1:27)

Yes.

David Gura (1:28)

Explain what you meant by that. I can't think of a CPI report that has had as much perceived importance as the one that we got last week.

John Authers (1:34)

This is one of the more plainly consequential ones. And the irony is that Kevin Warsh has set out his stall of against giving forward guidance, against boxing himself into corners.

But the way he presented himself at Jackson Hole a few weeks ago, when he complained that inflation was too high, he made the point that the level of inflation is unacceptable. He didn't talk about the direction of travel. He wasn't talking about are things steadily improving. He was saying this is too high. And the problem he then had was that last week's, last month's report, the level is still too high if you are serious about the Fed's target because of oil, thus he's more or less boxed himself into hiking because of the framework he gave us only a couple of weeks ago and because credibility is so important.

David Gura (2:32)

Maria Eloisa, I saw you in Jackson Hole after that speech. Was it immediately evident to you when he delivered it that this trap had been set and indeed he was wandering into it?

Maria Eloisa Capurro (2:42)

It was definitely something that we were asking people where they felt like caged in into September. But I think it's useful also to take a few steps before that, to shift back. And the reality is that there were members of the committee, this is not just Kevin Warsh, this is a committee of other people voting, there were already members of the committee who felt back in July that there was enough reason to hike. So we had three descents in favor of a quarter point hike. And at the same time, we had most recently, even after Warsh's speech, other members of the committee also saying that they're very concerned about inflation, that if August came in hot, they would be willing to consider a hike.

So it is pressure building also, I would say, like around him. In the sense of Warsh, he also came to Jackson Hall very pressured to deliver or to explain his thinking a little bit more.

David Gura (3:39)

Because he was so reluctant to do so.

Maria Eloisa Capurro (3:40)

Exactly. And it's not, as John was saying, not just his reluctancy to give worker guidance in terms of where interest rates are going, but he also wasn't giving much of his thinking around anything on the economy. July's pressure was very criticized. His answers to reporters were not very detailed into what is he thinking about inflation, where is he seeing signs that concern him, what does he think about the employment. So I felt like he felt forced to be more direct and he was.

David Gura (4:19)

How direct was he in talking both about the rate hike and the rationale behind it?

John Authers (4:25)

He was perhaps slightly more direct than he might have been. You could argue that he was arguing to a constituency of one, i.e. Donald Trump, in making it several times clear that this was from because of the economy being stronger than people thought it was, and that geopolitics had moved against.

But that was an interesting way to frame it, which he came up with several times. If you listened very carefully, he was saying that he was embracing a discipline rather than a decision.