Trump Picked Warsh to Cut Rates. Warsh Raised Them Instead

If you carry a balance on a credit card, the rate on it is about to go up a quarter of a point. Banks price cards, home equity lines and most small-business loans off the prime rate, and prime stood at 6.75% on September 9, exactly three points above the top of the Fed’s target range. On Wednesday, September 16, the Federal Open Market Committee (FOMC), the Fed’s rate-setting body, raised that range by a quarter point, to 3.75% to 4%. Expect prime at 7% before your next statement prints. The average rate on card accounts that carry a balance and get charged interest was already 22.15% in the second quarter, and Americans were carrying $1,357.2 billion in revolving balances as of July. A quarter point on that pile comes to roughly $3.4 billion a year in extra interest before anyone charges another dollar.

It is the Fed’s first rate increase since 2023, and it undoes one of the three cuts the Fed made last year. The vote was 12 to 0. The chair who announced it, Kevin Warsh, was picked by President Trump to do the opposite. Asked on NBC in February whether Warsh would have got the job had he said he wanted to raise rates, Trump answered: “He would not have gotten the job. No.”

What the Fed did on September 16

The September 16 statement is three paragraphs long. The operative sentence: “The Committee decided to raise the target range for the federal funds rate by 1/4 percentage point to 3-3/4 to 4 percent, in support of the Federal Reserve’s dual mandate.” On inflation it says only this: “Inflation remains elevated. Today’s policy action will support a timelier return to the Committee’s 2 percent goal. The Committee will deliver price stability.” The rest describes an economy the Fed sees as strong, not weak. “Economic activity is expanding at a solid pace,” it says; spending “has been resilient,” productivity growth “is strong,” and “the unemployment rate has changed little.”

The plumbing follows. The rate the Fed pays banks on reserves goes to 3.90% and the discount rate to 4.0%, both effective Thursday, September 17. The effective federal funds rate, what banks actually charge each other overnight, was 3.63% on September 14. It should settle near 3.88% once the new range takes hold.

The Fed also published its quarterly forecasts. The median official now sees the federal funds rate ending 2026 at 4.1%, up from 3.8% in June; of the 18 officials who submitted a forecast, 12 put the year-end rate at 4.125%, four put it higher, and two put it at the new level. A 4.125% midpoint means one more quarter-point hike at one of the two remaining meetings, October 27 to 28 or December 8 to 9. For 2027 the median is also 4.1%, so the typical official pencils in no cuts next year.

Why raise rates when core inflation looks tame?

One number makes the decision look strange. The Consumer Price Index (CPI), the inflation gauge in every headline, rose 3.4% in the 12 months to August. Strip out food and energy and the “core” figure was 2.4%, down from 2.5% in July. That core reading is the lowest since March 2021, by the US Inflation Calculator’s tally of the Bureau of Labor Statistics (BLS) series. The gap between headline and core is almost entirely fuel. Gasoline was 27.4% higher than a year earlier and the energy index 16.3% higher, and gasoline alone accounted for over a third of August’s monthly increase. Food was up 2.7% over the year and shelter 3.0%.

Rates do not refine diesel. The pump prices behind that 27.4% come from the Iran war and the refinery outages covered last week in Diesel Just Hit a Record. Here’s Why Your Groceries Care. A higher federal funds rate cannot reopen the Strait of Hormuz, and the Fed’s own July minutes describe the cause the same way, with inflation “in part reflecting supply shocks that have driven price increases in certain sectors, including energy.” Hiking into a supply shock, with real wages already falling, is the strongest argument against the September 16 decision, and it is not a fringe one. Mark Zandi, chief economist at Moody’s Analytics, put it to CNN in July: “Monetary policy 101 says when there is a supply shock, don’t respond. Follow the script. It’s worked pretty well.” He added: “Bottom line: I don’t think they should raise rates.”

The Fed’s answer is that it does not target the CPI. Its 2% goal is set on a different index, the Personal Consumption Expenditures (PCE) price index, and that one is nowhere near 2%. In July, the latest month available, PCE inflation was 3.7% and core PCE 3.3%. Warsh made the point directly at Jackson Hole on August 28: “The Fed’s price-stability objective of 2 percent, as measured by the personal consumption expenditures (PCE) price index, is a firm, fixed target.” He added a breadth measure the CPI headline hides: “Over the past 12 months, 54 percent of goods and services in the PCE basket showed price increases above 3 percent.” The Fed’s new forecast has core PCE ending 2026 at 3.4%, a tenth higher than it expected in June.

The two gauges are built from different baskets, so they can disagree by this much, and Warsh put them side by side himself: “Core PCE and CPI prices are running at about 3.2 percent and 2.4 percent respectively.” The plain version of the decision is this: the inflation you see at the pump is one the Fed cannot fix, and the inflation the Fed does target is still more than a point above its goal.

Meanwhile pay is not keeping up. Real average hourly earnings, pay adjusted for the CPI, fell 0.1% in August and were down 0.3% from a year earlier. That is the same annual decline flagged in May, when April CPI Hit 3.8%. Real Wages Just Went Negative. reported that real earnings “fell 0.5% on the month and 0.3% over the year.” Four months later the paycheck is still shrinking, and borrowing against it just got dearer.

What the hike does to your credit card, car loan, HELOC and savings

The Fed does not set the prime rate; banks do, and they have kept it three points above the top of the target range through the whole cycle, which is why 7.00% is the number to expect on the next statement. The card figure is the Fed’s own survey of commercial banks: 20.94% across all accounts, 22.15% on accounts that were assessed interest, and 7.14% on a 60-month new-car loan, all for the latest quarter published on September 8. The savings figure is the best online rate Fortune found on September 11, before the decision. A home equity line of credit (HELOC) is the fastest mover of all, because most are written as prime plus a margin and adjust the month prime does.

Will mortgage rates go up after the Fed hike?

Probably not because of the Fed. Fixed mortgages price off the 10-year Treasury yield, and the 10-year had already climbed from 4.80% on September 8 to 4.97% on September 14 as the hike became a near certainty. CNN reported that it closed above 5% on Tuesday, September 15, its highest close since 2007. Freddie Mac’s 30-year average was 6.76% for the week of September 10, up from 6.65% three weeks earlier. As CNN put it, the bond market “has already started doing some of the Fed’s work for it, making borrowing more expensive even before any rate hike.” If the Fed’s credibility argument works, long yields can fall on a hike, because investors expect less inflation later. If it fails, they rise anyway.

The site’s January piece on the “no landing” scenario, The 1994 Bond Massacre Redux, warned that a strong economy “forces the Fed to become the enemy again, tightening monetary policy into an already strong economy.” Eight months later, that is the statement the Fed just issued.

Was it Warsh, or the committee?

The easy story is a chairman going rogue. The vote says otherwise. The FOMC’s twelve voters this year are Warsh; Vice Chair John Williams of the New York Fed; governors Michael Barr, Michelle Bowman, Lisa Cook, Philip Jefferson and Christopher Waller; Jerome Powell, still on the Board after handing over the chair; and the presidents of the Cleveland, Minneapolis, Dallas and Philadelphia Feds. CNN put it plainly: “All of the Fed’s policymakers were on board with Wednesday’s decision, including Chairman Kevin Warsh himself.” Warsh submitted no forecast of his own, which CNN describes as part of his refusal to offer forward guidance, so the 18 dots are the other officials’ view, not his; “as in June,” he said, “I have not offered a projection of my own.”

Warsh’s own account, at the press conference that followed, was the committee’s. In July, he said, “we all agreed that inflation remained too high,” and “a good majority” preferred “to await new information in the inter-meeting period.” “The plain fact is that inflation is too high and has been for too long,” he said in his opening statement, and “this summer’s inflation readings do not tell me that underlying trends have meaningfully improved.” Asked what had changed since July, he named three things: recent data showing a strong economy, particularly in the labor market; inflation that stayed elevated over the summer; and geopolitics, which he did not tie by name to the Iran war. Asked about his conversations with the president, he gave reporters one sentence: “I’ve got nothing for you on the discussion with the president.”

Three of those presidents, Beth Hammack, Neel Kashkari and Lorie Logan, had already dissented in July because they “preferred to raise the target range for the federal funds rate by 1/4 percentage point at this meeting.” The minutes record that “many participants assessed that policy tightening would likely be necessary if inflation did not decline,” and that a few of the would-be hikers argued a move then “would likely help forestall the need for a steeper and potentially more costly sequence of tightening moves at a later stage.” Then August’s CPI came in at 0.4% for the month after 0.1% in July. The committee had said what it would do if inflation did not decline, and Warsh’s verdict on the summer readings, given at the press conference, was that underlying trends had not “meaningfully improved.” The boring explanation fits: a hike this well telegraphed is a committee decision, and Warsh’s job was to sign it.

That does not make the politics small. Warsh told the Senate Banking Committee in April that he had not promised Trump rate cuts and would be “an independent actor.” By August 31 Trump was giving him room: “I have a lot of respect for him and he’ll do what he has to do,” the president said. “I think our interest rates are too high.” Kevin Hassett, Trump’s top economic adviser, told Fox News on Sunday, September 13: “I’m sure he’s not going to be super happy about it, but he will defend the independence of Kevin Warsh above all.” The day before the meeting, Christopher Phelan, chair of the White House Council of Economic Advisers, told CNBC a hike would be a “mistake.” On Wednesday Hassett told CNN the president would accept the hike, and CNN notes Trump has aimed his fire at the Board of Governors, which he has called “hostile,” rather than at Warsh. Whether that restraint survives a second hike is the open question of the autumn.

One hike proves nothing. December does.

There is a precedent for a Fed chair raising rates on a wartime president, and it is not encouraging. On December 3, 1965, William McChesney Martin’s Board voted 4 to 3 to raise the discount rate from 4% to 4.5%, and two days later Lyndon Johnson had him at the Texas ranch: “You’ve got me in a position where you can run a rapier into me and you’ve done it. You took advantage of me and I just want you to know that’s a despicable thing to do.” Martin held the line that day, the Fed did not follow through, and inflation that had averaged about 1.5% a year from 1952 to 1965 ran about 4.5% a year from 1966 and reached 5.75% by 1969. The test of the September 16 decision is the second move the dot plot promises, and whether it arrives with the White House shouting louder than it did this week.

What to watch

• September 17: the big banks’ prime-rate notices, which show whether the usual spread over the Fed’s range holds and how fast cards and HELOCs follow.
• September 30: the August PCE report from the Bureau of Economic Analysis (BEA), the Fed’s own inflation gauge.
• Three weeks out: the minutes of this meeting, which will show how close anyone came to a half point.
• October 27 to 28 and December 8 to 9: the two remaining meetings, one of which the dot plot says brings the second hike.

The card statement that lands in October will carry the September increase. Whether a second follows in December is the one forecast in the Fed’s release that matters to your wallet.