Trade
Tariffs, take two
The Supreme Court struck down America’s emergency tariffs. Eight months on, most of them have been rebuilt on other legal foundations
Back on the brakes
An oil shock has pushed America’s central bank into its first rate rise since 2023. Kevin Warsh may not be done
When Kevin Warsh took the oath as chairman of the Federal Reserve on May 22nd, many in Washington assumed they knew what would follow. President Donald Trump had chosen him to replace Jerome Powell after years of complaining that interest rates were too high. Four months later Mr Warsh’s Fed did the opposite of what its critics in the White House wanted. On September 16th the Federal Open Market Committee (FOMC) voted 12-0 to raise its benchmark rate by a quarter of a percentage point, to a range of 3.75-4%. It was the first increase since July 2023.
The reversal is sharp. In the autumn of 2025 the Fed cut rates three times, in September, October and December, taking them to 3.5-3.75%, their lowest since late 2022. At the first five meetings of 2026 it sat still. Then the war came.
An unwelcome shock
American and Israeli strikes on Iran began on February 28th, and within days the Strait of Hormuz, through which a fifth of the world’s oil normally passes, was effectively shut. Brent crude passed $100 a barrel in March for the first time since 2022 and was still above $105 in mid-October. Petrol at American pumps averages around $4.33 a gallon, against $3.08 a year earlier.
Textbook central banking says a supply shock of this kind should be “looked through”. Higher oil prices raise inflation today but sap demand tomorrow; tightening policy in response risks hitting an economy just as it slows. The trouble is that America’s inflation problem predates the war. The Fed’s preferred gauge, the core personal-consumption-expenditures (PCE) price index, has run above 3% in every month of 2026. Headline consumer-price inflation was 3.4% in August. Five years above the Fed’s 2% target is long enough for households and firms to start treating high inflation as normal, and that is the risk the committee chose not to run.
Source: Federal Reserve
The economy gave the Fed room to act. The committee’s statement noted solid growth, strong productivity and heavy business investment, much of it in artificial-intelligence infrastructure. Job gains are keeping pace with the growth of the workforce, and unemployment has barely moved. A central bank rarely gets to tighten into a supply shock with the labour market in such good shape.
How high?
Officials’ projections suggest the job is not finished. The median participant expects one more quarter-point rise before the end of the year, taking the benchmark to about 4.1%, then no change in 2027 and cuts in 2028 and 2029. Policymakers expect PCE inflation of 3.7% this year, falling to 2.3% next year as the oil shock fades. In late September futures markets put the probability of another rise at the meeting on October 27th-28th at roughly 70%. John Williams, president of the New York Fed, has said one more increase this year looks appropriate, though he expects inflation to slow “quite a bit” in 2027.
Mr Warsh himself has refused to say what he will do at the remaining meetings of the year. An inflation report on October 14th, which came in hotter than forecasters had expected, may have made the decision for him.
The other lever
Interest rates are only half of Mr Warsh’s agenda. He has long argued that the Fed’s balance sheet, swollen by years of bond-buying and still about $6.7trn, is too big. In June he set up task forces to review how the Fed operates, most of which are due to report by the end of the year. He has warned that shrinking the balance sheet will take years rather than months, and minutes of the July meeting suggested that other members were wary of moving quickly. Analysts at Allianz Trade expect only a modest reduction, starting in the fourth quarter at the earliest.
Even a slow shrinkage matters. When the Fed lets bonds mature without replacing them, private investors must absorb more government debt. That comes at an awkward time. The ten-year Treasury yield rose above 5% in late September and hit 5.36% in early October, its highest in 24 years, as investors priced in higher inflation, bigger deficits and a less accommodating central bank.
Who blinks
So far the stockmarket has shrugged. The S&P 500 set a record on October 6th, carried by booming corporate profits. But the most rate-sensitive corners have suffered: utility shares fell by about 12% in the third quarter. If the Fed keeps raising rates while long-term yields stay above 5%, the strain will spread.
The irony of Mr Warsh’s first hike is that it may be the clearest possible proof of the Fed’s independence. A chairman appointed by a president who wanted cheaper money has raised its price. Whether he can hold that line if growth weakens before inflation does is the question that will define his term.
