With inflation troubles top of mind, the Federal Reserve makes its interest rate decision. The Fed Chair Kevin Warsh making the announcement just moments ago after facing months of pressure from President Trump. Let's get right to CNN's Matt Egan for the decision. So Matt, what is it going to be?
Boris, the Fed just delivered an interest rate hike, voting unanimously today to raise benchmark interest rates by a quarter of a point. Now, this is the first interest rate hike in three years. And notably, this is the first hike under Kevin Warsh, the Trump-nominated Federal Reserve chairman. And so, this does show that Warsh is willing to back up his tough talk with real action designed to fight inflation even when the president is demanding dramatically lower interest rates. Now, this move was widely expected because, of course, inflation does remain far too high and the inflation outlook has actually gotten worse in large part because of higher gasoline and diesel prices. Now, let me read you some new language that was inserted in the Fed's statement that helps explain why the Fed took this move. So, the Fed reiterated that inflation remains elevated, but they added in a new line saying that today's policy action will support a timelier return to the committee's 2% goal. I think that alludes to some frustration over how long inflation has been well above that 2% target. And the Fed reiterated that the committee will deliver price stability. Now on the job market, the Fed sounded much more upbeat. They reiterated that economic activity is expanding at a solid pace and they said that while uncertainty remains elevated owing in part to geopolitical developments, domestic spending has been resilient.
Now the Fed also just issued some new projections. Notably, the Fed is penciling in one more interest rate hike this year. However, should also note that there's one official that did not submit an interest rate projection. In the past, Kevin Warsh had said that he was not going to participate in this rate projection exercise. So, that is likely him. But now, all eyes will be on Kevin Warsh, who's expected to take questions at 2:30 Eastern time. And I'll be interested to hear what Warsh says about what changed, why they decided to raise interest rates when just about two months ago they decided to keep interest rates steady. And also what he's anticipating going forward in terms of future interest rate hikes. Back to you, Boris.
As we're watching markets, it appears that the Dow is essentially just flat. So, the market presumably was pricing in this rate increase. Aside from what it means for markets, which right now is not much. What does this mean for everyday Americans and their wallets?
Well, Boris, it means it just got a little bit more expensive to borrow. In particular, when you're looking at anything that's floating rate debt, it just got more expensive. So, think people who are carrying a credit card balance, home equity lines of credit, anything that's adjustable rate in terms of personal loans and student loans, and also going forward, car loans. But the other impact here to our viewers, of course, is on inflation itself, right? Because remember, the reason why the Fed is raising rates is because they're trying to cool off inflation. This is essentially the Fed tapping the brakes on the economy, trying to cool off demand and give supply time to catch up. But there's been some debate over whether or not an interest rate hike is even the right move here. Goldman Sachs has said that the economic case for raising interest rates was pretty weak. Other Fed watchers have said the Fed basically had to raise interest rates because the market was pricing it in. Boris, Federal Reserve Chairman Kevin Warsh is going to face questions on all of these topics later this hour. Back to you.
We look forward to that. We'll bring it to you live. Thanks so much. We're joined now by Stephen Moore, former economic adviser to President Trump. Stephen, thanks so much for joining us. How far does this quarter point rate hike go with another one penciled in for later in the year toward fighting inflation?
Well, a couple quick things. One is you are exactly right, Boris, when you said that the market had already priced in this rate cut. That's why you didn't see much of a change in the stock market when that announcement was made. Second of all, so much for the idea that Fed Chairman Kevin Warsh would not be independent. Obviously, he's pretty independent when his first move is to do exactly what the president didn't want him to do. As you may recall, of course, I was nominated in Trump's first term to be on the Federal Reserve Board. I didn't make it through that, but if I were on the board, I probably would have voted for this rate hike. Tough decision. Now, I want to make sure people understand that inflation is all driven by one thing. What's that? Oil price. Every morning I get up, the first thing I do is look at what's happened to the world oil price. So, you know, a rate hike isn't going to bring the oil price down because that's a global thing. If we can get that oil price down from right now it's at about $105 a barrel last time. If we can get it back down to say 70, you know, then we're going to conquer inflation. If you look at the report that just came out last week on consumer prices, it was pretty interesting. All the energy prices like gasoline and electricity prices were way up, but all the other prices were pretty subdued. So, it's all being driven by the Middle East.
Yeah. Yesterday the CBO said the Iran war is expected to spike inflation by half a point for the first quarter of 2027.
The CBO yesterday said the Iran war is expected to spike inflation by half a point first quarter 2027. Most of it obviously energy costs.
Would ending the war be the quickest way to deal with this inflation that we're seeing? So the problem is nobody knows what's going to happen in the Middle East. I mean no one knows what the world's going to look like in January, February of next year. So it's just hard to predict. This is the frustration of the White House. I mean, if I look objectively at the economy and Boris, most of the other indicators look very positive. I mean, we just got a report out yesterday from the Census Bureau that showed, you know, record low poverty rates, big increases in incomes. We have a construction boom going on thanks to AI and data centers. Manufacturing is good. It's just this one big sore thumb in the economy, which is this high oil price. And, you know, I lived this through the 70s and 80s when I was a kid. And it's just so frustrating. And it's all driven by the Middle East.
Part of the president's anger toward Warsh's predecessor Jerome Powell was the fact that Powell refused to drop interest rates. The president has been calling for that to happen. He's suggesting that the US interest rate is among the highest in the world. How do you think he's going to respond to this?
I think look I think it was important for Kevin Warsh to do this quarter point rate increase because and what he said in his brief statement was exactly right. The role of a Fed is price stability. That's all we want. You know, it's not climate change. It's not creating jobs. You make the economy most efficient when you get inflation low and you have a dollar that's stable in price. That's exactly what Kevin Warsh wants to do. That's why he raised interest rates. Hopefully, you know, you ask me about what happens next year. Hopefully, they'll be able to start cutting rates if the oil price starts coming down.
Do you think the White House is doing enough right now to tackle inflation? You know, there's this talk the president has about these $5,000 checks, which would be a massive infusion of cash. Is he doing enough?
Look, the US economy is the strongest in the world. No question about it. We're the envy of the world. You know, as I just said, all of these other indicators are very strong. In fact, there are more. The latest job report showed there's more jobs available than people to fill them. That's a good problem to have. So, it just I keep saying this, it all comes down to oil. One other point that Trump made by the way that is, I think, a good point that people should consider is Trump was saying that, you know, our interest rate on our bonds is higher than a lot of other countries.
I think it's a good point you make for people to look other places and say that it's better here. This may be an envious situation compared to some other countries, but you know how Americans feel it. We're obviously at a critical time politically. They don't they're looking at the gasoline price every day.
That's right. They don't they and they know how this war began, right? That this was a choice by the Trump administration. So they may say, 'Stephen, I don't really care that you're telling me it's great somewhere else because I'm struggling to pay to get to work.' So I mean, what does the Trump administration need to do? I've always in my 35 years as being an economist, you know, what is the one first gauge we look at on the economy? The gas price. You know, people are in a good mood when the gas prices are low. They're in a bad mood when they're paying $4.25 a gallon. So you're right about that. The question is what can the administration do at this point to bring the prices down. I mean I'm not an expert on this. There's no shortage of world oil. You know if we could get the Strait of Hormuz open the price would fall very dramatically. So it's a frustration and I agree with you. People are angry about food prices and gas prices.
You didn't say the solution was $5,000 checks notably.
I'm not a big fan of that proposal. Let's just say that. But right now it's not. You never create growth by sending out checks to people.
Some people might be a fan of a $5,000 check right now, though. Steve, great to have you.
Economic activity is expanding at a solid pace. While uncertainty remains elevated, owing in part to geopolitical developments, domestic spending has been resilient, productivity growth strong, and capital investment is robust. Job gains have kept pace with the workforce and the unemployment rate has changed little, but inflation remains elevated. Today's policy action will support a timelier return to the committee's 2% goal. This committee will deliver price stability.
Now, I'll get into some further detail. Our decision comes at a time when the American economy appears to be strengthening. New hiring, private sector earnings, business capital investment. Each of these markers has improved in recent months and is pointing in a good direction. Credit flows have been robust, particularly for businesses. And as I said at the policy symposium in Jackson Hole, I would be hardpressed to describe broad financial conditions as restrictive. This view was widely shared by the committee. So we removed a dose of accommodation. Consider the geopolitical landscape of shocks and uncertainty and you begin to appreciate the resilience of the US economy. Given that resilience and the potential for even greater performance, an attitude of optimism is exactly what I heard inside the FOMC these last two days.
One basic sign of strength is the state of America's labor markets. The jobless rate remains low at around 4.1%. And both job openings and weekly hours have been increasing. Unemployment claims on a 4-week moving average are running at levels consistent with full employment. So the labor side of the Fed's congressional remit is in good shape. Yet for more than five years, inflation has been running above target. So our predominant focus is on the price stability side of our mandate. The plain fact is that inflation is too high and has been for too long.
This summer's inflation readings do not tell me that underlying trends have meaningfully improved. Based on the most recent CPI and PPI data, the 12-month change in total PCE prices likely was around 3.6% in August. Core PCE and CPI prices running at about 3.2 and 2.4% respectively. Too many categories are still posting increases above 3% on both a six and 12-month basis. I noted in Jackson Hole that overall commodity prices also bear watching and over the intervening period the prices of many of these key inputs have risen.
Since my first FOMC meeting as chairman in June, my colleagues and I have been unequivocal in our commitment to price stability and to our 2% PCE inflation objective. At our July meeting, we all agreed that inflation remained too high and we expressed our joint readiness to act as circumstances might require and a good majority of my colleagues and I thought the wiser course then would be to await new information in the intervening period. Last month in Wyoming, I expressed my commitment to a monetary policy discipline, not to a decision. I define the standard for action. We must be confident that underlying inflation is moving to our objective clearly and at sufficient speed.
Today, the FOMC decided that this standard has not been satisfied. The committee's unanimous vote shows our resolve to achieve price stability on a timelier basis. We aim to ensure that credit and financial conditions are consistent over time with our mandate. That relative price changes in some sectors of the economy do not broaden. That inflation compensation in market prices stays low and that inflation expectations remain well anchored.
This afternoon, you also received the summary of economic projections. It reflects the views of my colleagues on the committee. But as in June, I've not offered a projection of my own. But like in June, I said I would faithfully discharge the summary of their projection. So here goes. In the summary's median projections, real GDP rises at 2.3% this year, 2.4% next year. Total PCE inflation runs at 3.7% this year and falls to 2.3% next year. The unemployment rate holds steady at about 4.1%. The median participant judges that the appropriate federal funds rate to be 4.1% at the end of this year and to remain there next year. Inflation risks are to the upside while labor risks are roughly balanced.
In my meetings these last few weeks in Jackson Hole, in Asheville at the G20 meeting which the US hosted and at a central bank conference in Basel, it was evident that most advanced economies are facing price pressures. Their central banks are making their own judgments consistent with their own remits. Our decision today reflects our best judgment in service to our remit.
We've been listening to the Federal Reserve Chairman Kevin Warsh as he details his thought process and the Fed Board's thought process when it comes to raising the interest rate a quarter of a percentage point today. Let's bring in CNN's David Goldman who's been following along. David, a positive outlook from the Fed chair saying that the labor market is in good shape. He also gave a bit of a prognostication as to where he believes the economy is headed. Something that he's been reticent to do in the past.
That's right. Yeah. I mean, the economy is strong and I think that you're hearing that from the Fed chair for a good reason because this is a blunt tool that they're using and when you raise rates, you have the opportunity and sometimes the unfortunate effect of hurting the job market because that's what it does. It's like a scale. When you raise rates, you hurt the job market, but you also hurt inflation. And that's the reason why they raise rates. Look at this. We're at 3.7%. That's nowhere near the 2% rate that they are hoping for. And it's only expected to go up and up and up and that is why they decided that they needed to act. As Kevin Warsh just said, inflation is too high. Boris, what did you think about that sort of optimism about the economy that he's sort of spinning there? You know, basically the fundamentals of the economy are strong even as he's emphasizing that the inflation is too high.
Yeah, it's really hard for a lot of Americans to hear that because people are facing this problem, right? They feel like prices are too high and so the economy is doing poorly. That is not true. The economy is doing quite well. It hurts though when prices are high and that is why the Fed acted today understanding that people are feeling a lot of pain and they need to get those prices well not prices back down but they need to get inflation back down to something that's tolerable. Price rates are so high that people just feel like they've lost control of their finances. And we're seeing that because of the Iran war. We're seeing that because gas prices and oil prices are rising and rising and rising. That really hurts. But the job market has been steady for a long time. We're at 4.1% unemployment. That is good. That's healthy. Consumer spending. We got a really good number today. That's good. This isn't. And that's why the Fed's addressing that today.
David, you went into more detail than the brief segment of what we heard from Warsh there about the war in Iran. He simply described it as geopolitical events.
Geopolitical developments.
Developments. Yeah. I wonder when we talk about the high price of gas right now and how that, you know, generates more inflation, is there much that the Fed can do with the blunt instrument that you described when there is no end in sight right now to this war and the high price of gas and diesel?
No. And that is the key thing because these rate cuts are a very blunt tool and you can hurt the economy when you raise them. But here's the thing, rate hikes don't do anything about the Iran war. That's going to continue. And you know, there seems to be no end in sight. And so if oil prices keep going higher and higher and higher, that's not something that the Fed chair is able to fix. He can't open up the Strait of Hormuz. He can't stop the Houthis from bombing pipelines in Saudi Arabia. And so we've opened up this can of worms that he has little ability to control. The worry is, well, did the Fed just raise rates and we're going to hurt the job market, but we're not going to address this problem. That we'll have to see in the coming months.
That geopolitical developments was doing a lot of work in his comments there, Boris. I think a lot of work.
A lot of work. David Goldman, appreciate you. Thanks for joining us.
Defying President Trump, the Federal Reserve just unanimously voted to raise US interest rates. This hike happened just months after the president handpicked Chairman Kevin Warsh with hopes of getting rates lowered. And moments ago, Warsh explained his decision.
The plain fact is that inflation is too high and has been for too long.
The first rate hike in three years means these things are going to get more expensive for Americans. We're talking about credit cards, home equity lines of credit, adjustable rate mortgages, certain personal and student loans, and of course, car loans as well. We're joined now by Douglas Holtz-Eakin. He served as chief economist for President George W. Bush's Council of Economic Advisers. He's also a former director of the Congressional Budget Office. Doug, great to see you as always. How are you looking at the independence of the Fed and Fed Chairman Kevin Warsh after this announcement and the sort of positive spin he gave during his press briefing there?
Well, the Fed did its job. The reality is inflation has been too high for too long and a lot of people have focused on recent events like the war with Iran, global oil prices. I think the telling fact is that if you look at core inflation that excludes food and energy, the things that have been bouncing around a lot. The Fed's preferred measure of core inflation has been at 3% since 2023. So that's too long. It needs to get back to the 2% target. It took a step toward doing that today. That's the right thing in my view. We now see how the rest plays out. To your point on the president being unhappy, he's been known to respond and the Fed now just has to stick to its guns and do its job.
We're looking at the market now and it's responding a little more negatively than it did just initially after it seemed to be indicating that perhaps this prediction was kind of baked in to what was going on there. Maybe not the case. He expressed optimism, Warsh did about the fundamentals of the economy. He wasn't shy about the problems of inflation. Do you think Wall Street thinks the Fed is doing what it needs to do to tackle inflation?
I think that Wall Street expected 25 basis points today and Wall Street got it. And so I didn't expect the big reaction from that. We didn't know what the chairman would say. And one of the real tests here is if it's the case that people are very worried about the Fed not controlling inflation, then long-term interest rates will go up for that reason. And long-term rates have drifted up. So, if the Fed convinces people they're really after inflation and that that inflation threat's going away, you could see short rates go up, but long rates come down. And that would help things like mortgages, that would help things like auto loans. So, that's what I'm watching it for over the next couple of days. I'm not sure they made the case entirely the first couple hours here, but it's worth keeping an eye on.
So Warsh even alluded to it during his time at the podium that he is not a fan of giving these further out prognostications of what the Fed might do, but yet he did share some sort of near-term outlook. What were your takeaways about what he shared?
