Hello! I'm your friend, an economist and financial journalist. Today, we're going to discuss an article about the new chairman of the Federal Reserve, Kevin Warsh, and the shift in his policies. It's packed with a lot of information and some quite counterintuitive dramatic moments.
To make it easier for you to understand, I'll first summarize the main points of the article in plain language and then break it down into five key aspects to show you what's really happening and what it means for your and my wallets.
📝 Summary of the Main Points: The End of Shifting the Blame and the Beginning of a Tougher Road
In simple terms, this article says that the Federal Reserve is no longer making excuses; it's taking real action to combat inflation.
For the past five years, prices in the U.S. have been failing to come down. The Federal Reserve and politicians have always blamed external factors like rising oil prices, wars, and disrupted supply chains, suggesting that things would get better if we just waited. But the new chairman, Kevin Warsh, has thrown away that excuse.
At the September meeting, he did three important things:
1. Raised interest rates: The decision was unanimously approved, raising interest rates for the first time in three years.
2. Deleted a statement: They removed the phrase from the official statement that said inflation was partly caused by external supply shocks. In other words, they're no longer blaming external factors; it's our own fault, and we need to take responsibility.
3. Changed his stance: Warsh was nominated by Trump, and people thought he would cooperate with the White House to cut interest rates. Instead, he raised rates after taking office and refused to give the market any promises about future rate cuts.
The conclusion is: The era of high interest rates has returned, and it might last longer than anyone expected. Before, people were betting on when rates would come down; now, we have to worry about how long they will stay high.
---
🔍 In-Depth Analysis: Five Aspects to Understand This Change
1. The Deleted Sentence Is More Valuable Than the Added One
[Interpretation: From Shifting the Blame to Taking Responsibility]
In the financial world, changes in the wording of official documents are often more significant than the numbers themselves. The most subtle change in this Federal Reserve statement wasn't the rate hike itself, but the deletion of a particular sentence.
- Previous statement (July): “Inflation is high, partly due to external supply shocks such as energy.”
- *In plain language:* Prices are rising because of high oil prices, freight costs, and wars. These aren't our problems; they're caused by external factors. So we can wait until things calm down.
- Current statement (September): The second half of the sentence is gone; they just say “inflation is high.”
- *In plain language:* The external factors don't explain the high inflation anymore, or perhaps we don't want to use them as an excuse anymore. High inflation is mainly due to our own loose monetary policy; it's our responsibility.
Why is this important?
If the sentence had remained, the Federal Reserve would have had an excuse: “We need to wait because external shocks are still affecting us.” By removing it, they're admitting that they have to take action to control inflation. This explains why Warsh raised rates so suddenly—he no longer believes that inflation will go away on its own.
2. Warsh's “Political U-turn”: Nominated to Cut Rates, but Voted for a Rate Hike
[Interpretation: A Test of Independence and the Return of the “hawkish” Approach]
This part is quite dramatic. Trump nominated Warsh, and the market expected him to be pro-business and cut rates to boost the economy. But what happened?
- Nomination background: Warsh was nominated by Trump, and his father-in-law is a Trump supporter; his wife comes from that family. People thought he would follow the White House's wishes.
- Actual actions: After taking office, he not only didn't cut rates but also voted for a 12-0 rate hike on September 16.
- Deep logic:
- Proof of independence: The core value of a central bank is independence. If the chairman cuts rates as soon as he takes office at the president's request, the credibility of the dollar would be damaged. By raising rates, Warsh is showing the world: “Although you nominated me, I'm in charge of controlling prices, not your votes.”
- Rebellion against models: Warsh isn't the type of person who just sits in an office and relies on mathematical models. He has practical experience (he's done mergers and acquisitions and survived the 2008 crisis). He dislikes relying too much on models to predict the market and believes the market should bear its own risks, rather than relying on the Federal Reserve’s “forward guidance” (i.e., predicting the next move for the market).
- Result: He canceled the “forward guidance” and refused to provide his own rate forecast. This means: “Stop guessing; the Federal Reserve won't tell you what to expect.”
Implication for ordinary people: Don't expect the Federal Reserve to loosen monetary policy to align with political cycles (like before elections). The new logic is: If prices don't behave as expected, interest rates won't come down.
3. The Paradox of Inflation: Not Everything Goes Up
[Interpretation: Why You Can't Afford Beef but Can Buy Eggs Cheaper]
Many people think inflation means everything gets more expensive, but the data shows a more complex and even divided reality.
- Beef and inflation: Beef prices are expected to rise by 9.8% in 2026.
- *Reason:* There are fewer cows in the U.S.; the cattle herd has shrunk to its smallest size in 75 years. Raising cattle is a slow process, and it will take more than two years to replenish the herd. This has nothing to do with oil prices or wars; it's purely a domestic supply issue.
- Eggs and inflation: Egg prices have plummeted by 30%.
- *Reason:* A previous avian flu reduced supply, but now supply has recovered and even exceeded demand.
- Vegetables and inflation: Tomato prices have risen by 12.8%, and lettuce by 7.5%.
Key insight: If you mainly buy beef, you'll feel the impact of rising prices; if you mainly buy eggs, you might think prices have dropped. This contradicts the idea that inflation is caused by external factors alone. Beef prices are high because there are fewer cows (domestic agricultural cycles), while egg prices have dropped because there are more chickens (domestic supply recovery). This shows that the causes of inflation are mixed, including both external factors (like energy and tariffs) and internal factors (such as domestic agriculture and AI chip demand).
4. Historical Comparison: Warsh vs. Volcker—Who Is More Tough?
[Interpretation: The Cost and Determination of This Rate Hike]
The article compares Warsh to the legendary Paul Volcker in 1979.
- Volcker (1979-1982):
- *Background:* Inflation was at 14.8%, and the economy was on the brink of collapse.
- *Actions:* He raised interest rates to over 19%, even 22%.
- *Cost:** This led to two severe recessions, with unemployment soaring to 10.8%. Farmers blocked roads with tractors, and car manufacturers sent the keys to unsold cars to the Federal Reserve.
- *Result:* Inflation was completely tamed, and the U.S. entered a 20-year period of low inflation.
- Warsh (2026-):
- *Background:* Inflation is at 3.4%, and the economy is still growing; unemployment is at 4.1%.
- *Actions:** He raised rates and hinted he might continue to do so.
- *Difference:** Volcker was forced to act (else the economy would collapse); Warsh is choosing to act now, when the economy is still doing well.
Why is Warsh's approach more concerning?
Volcker had no choice but to act; Warsh is choosing to tighten monetary policy when the economy is still relatively strong. This means he's willing to endure short-term pain for long-term price stability. The IMF predicts that it might take until the end of 2027 for inflation in the U.S. to return to 2%. This suggests that high interest rates will be a long-term trend.
5. Market Reaction: From “Guessing Rate Cuts” to “Betting on High Rates”
[Interpretation: You Need to Update Your Investment Strategy]
What happened to the market after the September 16 rate hike?
- Stock market: The Dow Jones fell 1.21%, hitting a recent low. People are worried that high interest rates will hurt corporate profits.
- Bond market (important): The yield on 30-year U.S. bonds reached 4.97%, much higher than the policy rate.
- *In plain language:* Investors think lending money to the U.S. government for 30 years is too risky due to possible long-term inflation, so they demand higher interest as compensation.
- Shift in thinking:
- *In the past two years:** The market was playing a guessing game: When would the Federal Reserve cut rates? If you guessed correctly, you could make a lot of money.
- *Now:** The game has changed. The market is no longer guessing when rates will come down but how long they will stay high.
- Two groups of investors:
1. Optimists: Think inflation will go away on its own, and the Federal Reserve will cut rates eventually.
2. Pessimists (Warsh supporters): Think the Federal Reserve will keep raising rates until prices behave.
Advice for ordinary people:
- Mortgage/lending: If you're planning to buy a house or borrow money, don't expect interest rates to come down soon. Prepare for long-term high rates.
- Investing: If you used to make money by betting on rate cuts, that strategy no longer works. You need to focus on assets that can withstand high interest rates or benefit from inflation (such as certain commodities and energy stocks), rather than just tech or growth stocks.
- Mindset: Accept the possibility of high interest rates becoming the new norm. Just as we used to be used to low prices, we might now have to adapt to higher interest costs.
💡 Conclusion
The main message of this article is that the era of shifting blame is over. For the past five years, we've been listening to excuses like “just wait,” “external factors,” and “temporary.” But Warsh's action—raising rates and removing the excuse—shows that inflation is not temporary or someone else's fault; it's the result of our own policies, and we need to address it with internal measures (such as raising rates).
For ordinary people, this means:
1. The pressure of rising prices may continue, especially for goods affected by domestic supply.
2. Money has become “more expensive”; borrowing costs will rise, and interest on savings may also increase (depending on banks).
3. Don't expect rapid economic stimulus; the Federal Reserve's top priority is to cool down the economy, not to stimulate it.
This is about a battle between discipline and pain. Warsh has chosen discipline, and we will have to endure short-term high interest rates and rising prices.