Why the Federal Reserve hiked rates this week

Federal Reserve chairman Warsh and his colleagues on the Federal Open Market Committee see a buoyant economy and inflation that is taking too long to come down. That combination means it's time to unwind some or all of last year's interest rate cuts.

The big picture: That's the picture of the economic landscape that Warsh painted Wednesday, offering his clearest communication yet of his read on the economy and how that read translates into interest rate policy.

• It amounts to a corrective not just to Warsh's vagueness at his first two policy meetings as chairman, but to his predecessors' decision last year to cut interest rates three times on the belief that inflation was under more control than it turned out to be.

Zoom out: The U.S. economy and job market have proved strikingly resilient this year.

• The Iran war (or "geopolitical developments," as Warsh takes care to call it) has created a new surge in energy prices that if anything is re-accelerating — and there are signs that those prices are filtering out to a broader range of consumer goods and services.
• Financial conditions, meanwhile, are loose, with the stock market hovering near all-time highs and vast sums being raised through bond issues. And as Warsh put it, "credit flows have been robust, particularly for businesses."

Zoom in: It all makes the three rate cuts the Fed enacted in the final months of last year look like a poor match for the economic moment. Officials then were worried about a deteriorating labor market and were confident inflation was on a glide path downward, neither of which has been a feature of the 2026 economy.

• Wednesday's rate hike "removed a dose of accommodation," the Fed chief said in his news conference.

What's next: Warsh himself is skeptical of the Fed's practice of releasing officials' projections for future interest rates and economic conditions, but it remains a useful tool for understanding the conventional wisdom among policymakers.

• The new projections released Wednesday show that 12 of 18 top officials expect one more rate hike this year to be justified, and four more envision two. (Warsh elected not to submit a projection.)
• It follows that at least one more rate hike is highly likely in one of the two remaining meetings this year, with moves at both meetings if inflation data comes in hot.

Of note: President Trump criticized the rate hike late Wednesday but said it was due to Warsh having to deal with a "very tough board," suggesting that the chairman was forced to raise rates by the rest of the FOMC, who are animated by anti-Trump bias.

• "I talked to Kevin. I said, 'You might as well vote with the board because it's not going to matter,'" Trump said.
• An irony is that this move reversed a rate cut that this same assemblage of Fed officials enacted just nine months ago, while Trump was president.