Table of Contents

• You might want to know


• Main Topic


• Key Insights Table


• Afterwards...

You might want to know

1) If the Fed hikes tonight, how would it change the path for expected rate cuts in 2025?

2) Could a one-time rate increase be enough to rebalance policy given persistent core inflation above target?

Main Topic

This article examines why a group of economists has publicly urged Federal Reserve Chair Kevin Warsh and the Federal Open Market Committee (FOMC) to implement a rate increase at the upcoming policy announcement—expected at 2:00 AM Taipei time—rather than maintain the current stance. The debate rests on several interconnected considerations: the trajectory of core personal consumption expenditures (PCE) inflation, the interpretation of labor market strength, how much prior easing should be reversed, and the implications of shifting neutral rates amid changing investment dynamics such as increased AI-driven capital spending.

Proponents of an immediate hike argue the policy mix is too loose relative to inflation outcomes. As voiced by Joe Lavorgna of SMBC Nikko Securities, the core PCE inflation measure favored by the Fed has persistently exceeded the 2% target by more than one percentage point for several years. For those economists, this persistent gap is not a transient noise but a clear signal that policy remains insufficiently restrictive. They contend that maintaining the current rate path while projecting multiple rate cuts in 2025 risks accommodating inflationary pressures, potentially undermining the Fed’s credibility on price stability.

Another strand of the argument focuses on labor market resilience. With employment and wage dynamics demonstrating sustained strength, supporters of a near-term hike see limited downside risk from tightening relative to upside risks of inflation becoming entrenched. In their view, reversing a portion of past easing—effectively restoring some of the tightening that was undone—would be a prudent recalibration rather than an aggressive pivot. This view frames the proposed action as a measured step to align policy with evolving economic conditions.

A further dimension centers on the concept of the neutral or natural rate of interest. Economists urging a hike point to structural shifts—most notably elevated investment in technology and AI—that are pushing up demand for credit and raising the economy’s neutral rate. If the neutral rate is indeed higher than previously estimated, then current policy rates may be less restrictive in real terms than policymakers believe. In that light, a modest increase could merely restore policy to a stance closer to neutral, rather than producing undue contraction.

Housing is often cited as the only sector visibly feeling the effects of tighter monetary policy. Lavorgna notes that while mortgage rates and housing activity have slowed, residential investment constitutes roughly 3% of GDP, which is insufficient by itself to indicate broad-based tightness. Therefore, focusing solely on housing would understate how other pockets of the economy—credit markets and business investment—respond to policy. That argument supports a targeted adjustment meant to address broader inflationary signals rather than reacting to a single sector.

Not all policymakers or market participants share this view. Most traders and economists, evidenced by CME FedWatch probabilities and FactSet surveys, have been pricing in a higher likelihood of no-change decisions. Several practical and strategic considerations explain the reluctance to raise rates immediately. First, the new Fed leadership under Chair Warsh has emphasized careful communication and institutional reform; an unexpected hike could complicate those priorities. Second, a move to tighten now could trigger political costs or public criticism, including from influential voices skeptical of Fed decisions. Third, the Fed is actively recalibrating its forward guidance toolkit; preserving flexibility by holding steady allows the committee to gather more data before making a decisive shift.

Chair Warsh’s early actions have already altered how the market reads Fed signals. He has scaled back the Fed’s historical reliance on explicit forward guidance, leaving market participants with fewer pre-decision cues than in prior cycles. This increased opacity means the committee retains discretionary latitude, but it also raises the stakes of any surprise move. Warsh himself has acknowledged the possibility of public dissent within the committee, and an immediate hike would represent a consequential test of his leadership and of the new communication regime he is building.

Market reaction scenarios vary. If the Fed raises rates tonight, proponents expect an upward revision in short-term rate expectations and a potential flattening of the yield curve as the market reprices the path of future policy. That could slow risk-taking and temper some asset prices while demonstrating the Fed’s willingness to act to defend its inflation target. Conversely, if the Fed stands pat, market participants may continue to price in easier financial conditions into 2025, reinforcing expectations of one or more rate cuts. This could embolden borrowing and investment decisions now, but also risk a longer, more stubborn inflation problem.

In sum, the call for an immediate hike reflects a minority view grounded in sustained core inflation above target, robust labor market conditions, and a reassessment of neutral rates amid structural shifts like AI-driven capital spending. The countervailing majority prefers patience—valuing data accumulation and managing the communication and political implications of a surprise tightening. The Fed’s decision will thus hinge on how policymakers weigh these trade-offs and whether they prioritize preemptive action against inflationary persistence or prefer to preserve optionality by waiting for clearer signals.

Key Insights Table

Afterwards...

Looking forward, the Fed’s choice will shape expectations for the entire policy calendar. If policymakers demonstrate a willingness to tighten preemptively, markets may revise down the odds of large-scale easing in 2025 and place a premium on data that confirm a cooling of core inflation. If the Fed instead holds steady, attention will shift to the incoming data sequence—especially core inflation prints and labor market indicators—that could either validate patience or force a later, potentially larger, adjustment.

For observers, investors, and businesses, the prudent approach is to monitor several high-frequency indicators: monthly core PCE and CPI releases, payroll and unemployment trends, corporate investment intentions, and credit conditions that reflect the evolving demand for borrowing. These pieces together will determine whether tonight’s decision was an isolated corrective measure or the opening move in a broader repricing of monetary policy expectations.