Wosh: The interest rate hike demonstrates the firm consensus within the FOMC; inflation has been too high for too long, and reducing inflation will not sacrifice employment (full text attached)

Author: Yang Chen

The Federal Reserve raised interest rates by 25 basis points against a backdrop of inflation still above target, but with the U.S. economy and labor market showing resilience. Chairman Walsh clearly stated that the current priority is to drive inflation back to the 2% target in a more timely manner while refusing to provide forward guidance on future interest rate paths.

In a press conference following the monetary policy meeting, Federal Reserve Chairman Walsh stated that the Fed decided to raise the target range for the federal funds rate by 25 basis points to support its dual mandate. He emphasized that the U.S. economy is strengthening, the labor market is generally near full employment, but inflation is "too high and has persisted for too long."

Walsh noted that current domestic spending in the U.S. is resilient, productivity growth is strong, capital investment remains robust, and credit flows, particularly corporate credit, have been "very strong." Meanwhile, he believes that the current broad financial conditions are not restrictive.

"I find it hard to describe broad financial conditions as restrictive," Walsh said. He indicated that this judgment is widely shared by the committee, which is why the Fed decided to "remove some accommodation measures" to align financial and credit conditions more closely with policy objectives.

Inflation Remains the Core Issue

Walsh repeatedly emphasized in the press conference that inflation is the core reason for this policy action.

"The obvious fact is that inflation is too high and has persisted for too long."

However, he stated, "According to the latest CPI and PPI data, the underlying trend has shown meaningful improvement." The year-on-year increase in the total PCE price index for August may be around 3.6% (compared to 3.7% in July), with core PCE and CPI at approximately 3.2% (3.3% in July) and 2.4%, respectively.

He previously mentioned at the Jackson Hole conference that the Fed needs to observe inflation trends rather than focus solely on a single data point. At this press conference, he reiterated:

"Trends are important. Data points are noisy, and reliance on data points is a dangerous focus."

Walsh stated that for about the past decade, market participants and reporters have become accustomed to "holding their breath for a single data point," but that is not his decision-making approach. "I am not holding my breath for any specific data, whether it's this morning's retail sales or last week's CPI."

Why Have Long-Term U.S. Treasury Yields Increased? Walsh Provides "Three Main Reasons"

In response to the significant rise in long-term U.S. Treasury yields in recent months, especially in recent weeks, Walsh expressed his hope to let the bond market "tell me any story they want to tell" and to analyze the reasons behind the yield changes.

He provided three main factors.

The first is the strengthening U.S. economy. Walsh stated that part of the reason for the rise in long-term yields is due to the strengthening economic power.

The second is capital competition. He specifically mentioned the surge in capital expenditures and the phenomenon of large companies financing in the market. "Capital competition is real. I think this partly explains the increase in yields."

The third is geopolitical factors. Walsh noted that geopolitical hotspots around the world are pushing up long-term yields.

He emphasized that this impact is not just about the rise in spot prices of commodities like energy, corn, soybeans, or wheat, but also involves changes between these spot prices and the so-called "crack spreads," as well as the ultimate impact on the prices of goods in stores across the country.

"This is a complex set of issues that is affecting the most important assets in the world."

He also mentioned that U.S. Treasury bonds are a risk-free asset, "almost every asset in the world is related to it."

No Need to Sacrifice Employment to Lower Inflation

Regarding whether interest rate hikes could ultimately lead to economic growth falling below potential and worsen the job market, Walsh's answer was relatively clear.

"I don't believe we need to harm the labor market to achieve our goals."

He stated that the current U.S. unemployment rate is essentially consistent with full employment, and price stability and full employment are not necessarily in conflict in the medium term.

Walsh believes that as long as price stability is maintained, conditions can be created for more sustainable economic growth.

"Economic growth means ensuring sustained, sustainable, and lasting economic growth; that is the industry we are in and the work we are doing today."

He particularly emphasized the importance of price stability for low-income groups.

The "least affluent" people Walsh refers to mainly include those without financial assets, home equity, or 401(k) assets, "they live paycheck to paycheck."

He stated that if inflation can return to around the 2% target, these individuals can achieve better real income growth from their wages.

AI is Important, but Policy Decisions Do Not Belong to the Federal Reserve

When asked about the rapid development of AI and warnings from industry professionals about the risks of losing control, Walsh stated that he has spent a lot of time thinking about AI and its economic impacts.

"We are very concerned about what is happening with artificial intelligence. We are very focused on its impact on economic demand and ultimately on economic supply."

He revealed that the Federal Reserve has established a special task force that plans to submit a report by the end of the year to help the Fed consider the potential impacts of AI on the future policy environment.

But Walsh emphasized, "The risks, returns, and policy choices related to AI fall within the decision-making scope of other government departments. For the Federal Reserve, the focus needs to be on how these policy decisions ultimately affect its daily work."

Full Transcript of Federal Reserve Chairman Walsh's Press Conference
Walsh's Opening Remarks:

Good day, the Federal Open Market Committee has decided to raise the target range for the federal funds rate by a quarter of a percentage point to 3.75% to 4% to support the Federal Reserve's dual mandate. The committee is continuing its policy of maintaining sufficient reserves in the banking system. As noted in the recently released policy statement, economic activity is expanding at a robust pace, while uncertainty remains high, partly due to geopolitical developments.

Domestic spending is resilient, productivity growth is strong, capital investment is robust, job growth is keeping pace with labor growth, the unemployment rate has not changed much, but inflation remains high. Today's policy action will support a timely return to the committee's 2% target. This committee will achieve price stability. Now, to further understand the details, our decision was made at a time when the U.S. economy appears to be strengthening new hires, private sector earnings, and business capital investment. Each of these indicators has improved in recent months and points in a positive direction.

Credit flows have been very strong, especially for businesses. As I mentioned at the Jackson Hole policy symposium, I find it hard to describe broad financial conditions as restrictive. This view is widely shared by the committee, which is why we removed some accommodation measures. Given the shocks and uncertainties from geopolitical situations, one begins to appreciate the resilience of the U.S. economy. In light of this resilience and greater performance potential, the optimistic attitude is precisely what I heard in the FOMC over the past two days.

The state of the U.S. labor market is a fundamental indicator of strength. The unemployment rate remains low at around 4.1%, job vacancies and weekly hours worked are increasing, and the four-week moving average unemployment rate is consistent with full employment. Therefore, the Federal Reserve is in good shape regarding labor within its congressional mandate. However, inflation has been above target levels for more than five years.

Thus, our primary focus is on price stability as part of our mission. The obvious fact is that inflation is too high and has persisted for too long. The inflation data from this summer did not tell me that. According to the latest CPI and PPI data, the underlying trend has shown meaningful improvement. The year-on-year change in total PCE prices for August may be around 3.6%.

Core PCE and CPI prices are approximately 3.2% and 2.4%, respectively. Too many categories are still reporting increases of over 3% for 6 and 12 months. I pointed out at Jackson Hole that overall commodity prices are also worth noting, as during intermittent periods, the prices of many key inputs have risen.

Since my first FOMC meeting as chairman in June, my colleagues and I have been clearly committed to price stability and our 2% PCE inflation target. At our July meeting, we all agreed that inflation remains too high, and we expressed a willingness to act collectively as needed based on circumstances. Most of my colleagues believe that a wiser approach is to wait for new information in the interim. Last month during my time in Wyoming, I expressed respect for monetary policy discipline rather than support for decision-making. I define the standards for action.

We must be confident that underlying inflation is clearly moving toward our target at a sufficient pace. Today, the FOMC decided that this standard has not been met. The committee's unanimous vote indicates our determination to achieve price stability on a more timely basis. Our goal is to ensure that credit and financial conditions remain aligned over time, and our task is to ensure that relative price changes in certain economic sectors do not widen, that inflation compensation in market prices remains low, and that inflation expectations remain well anchored.

This afternoon, you also received the Summary of Economic Projections. It reflects the views of committee colleagues, but just like in June, I did not provide my own projections. But just like in June, I said I would faithfully fulfill their summary of projections. So, here it begins. In the summary of median projections, the real GDP growth rate for this year is 2.3%, and 2.4% for next year. The total PCE inflation rate for this year is 3.7%, dropping to 2.3% next year. The unemployment rate stabilizes around 4.1%. The median participant judges that the appropriate federal funds rate at the end of this year is 4.1%, remaining unchanged next year.

Inflation risks are to the upside, while labor risks are roughly balanced, as I observed at the G20 meeting held in Asheville at Jackson Hole in recent weeks, which was hosted by the U.S., and at the central bank meeting in Basel, it was clear that most developed economies are facing price pressures. Their central banks are making their own judgments within their mandates.

Today's decision reflects our best judgment in service of our mandate. The Federal Reserve plays a role in maintaining the economic progress currently happening in the U.S. and the growing opportunities associated with it. Those who are least affluent can benefit the most from sustained expansion, a solid labor market, and stable prices. We at the Federal Reserve are unwavering in our pursuit of our important and direct goals of full employment and price stability, as well as a thriving U.S. economy that sets standards for the world.

Q&A Session

Question 1

A 25 basis point rate hike will not reopen the Strait of Hormuz, so I wonder how you think these smaller rate hikes will be effective, as they may not necessarily address the energy supply aspect of inflationary pressures?

Walsh

Good question. We cannot affect any individual prices, whether it's oil prices or food in grocery stores, but what we can and will do is ensure that any changes in relative prices do not widen and do not have secondary and tertiary effects on the economy. That is our task, and that is what we will do.

Question 2

Colby Smith from The New York Times. When the Federal Reserve begins to raise rates, it typically goes through a series of rate hikes. Is there any difference in today's assessment of economic conditions that suggests the typical pattern may not apply? I guess secondly, if most of the factors keeping inflation high stem from supply shocks, what impact do you expect rate hikes to have at this critical moment?
Walsh

So we are working hard to reach more people. So, I will pick my favorite questions from you, Colby, which shouldn't surprise you. I am not in the business of forward guidance. The decision we made today is a calm decision, a serious decision, a responsible decision, which I have been preparing and thinking about during my 110 or 120 days here. You have effectively heard from others what their predictions are. I will not prejudge any decisions we make in the future. You may have heard me say in Jackson Hole that I am committed to a set of disciplined principles. I commit to looking out the window to see what I can observe. That’s what I did in Jackson Hole. That’s what we did today. Question 3

Edward Lawrence from Fox Business. The market is pricing in a 90% chance of a rate hike today. You don’t want the Federal Reserve to lead the market. Is this a market-led rate hike? And then do bond yields rise as a result? Is debt part of this issue?

Walsh

The Federal Reserve has tremendous power. These are the decisions we make, but understanding the relationship between financial markets and the Federal Reserve correctly is a balance that I have long believed could be better achieved. The decision we made today is based on our assessment of the situation, based on our assessment of the employment trajectory, based on our judgment of economic strength. Sometimes the market tries to prejudge our outcomes. I will observe market prices to see what they have to say. But today is our decision.

Question 4

Elizabeth Schulze from ABC News, I wonder if you could tell us what today’s actions mean for the American consumer? And I have to ask, what message do you have for President Trump, who has repeatedly called for rate cuts instead of hikes?

Walsh

In discussions with the president, I have nothing to offer you, but I won’t take this as a question you pose to the American people. As I said in my prepared remarks, the least affluent benefit the most from stable prices. The decision we made today is the right decision to fulfill the responsibilities Congress has given us to ensure price stability. Additionally, I want to say that due to the potential strength of the economy, because our actions are essentially consistent with full employment, we can focus on stabilizing prices. A few months ago, I said we would provide stable prices. Today’s actions are consistent with that.

Question 5

Can you tell us more about what has changed since the July meeting? As you pointed out, the Federal Reserve has maintained its stance until today. As part of that, could you give us a sense of whether today’s retail sales report indicates that demand is heating up and may threaten higher prices?

Walsh

Thank you, so you may know I am not a data-dependent person, so I won’t react to the data that appears at our doorstep in one way or another.

But regarding your first question, I think it’s more important to consider what has happened in the seven weeks since we last met, I would say most people. Seven weeks ago, my colleagues thought that seven weeks was a good investment, a way to buy time so we could make informed decisions. I would emphasize three things that happened during that time frame.

First, I may have had a judgment about the strength of the economy seven weeks ago. There is a fairly broad set of data, including a labor market that has already strengthened.

You may have heard me say this a few weeks ago in Jackson Hole. This is my judgment, and the committee has a second inflation trend. I said in Jackson Hole that trends are important. I said in Jackson Hole that we need to look out the window and ask what is real. My judgment a few weeks ago was inflation. The summer trend did not pass the test. I saw very little information that would make me change that decision. I held firm. The third thing that changed in seven weeks is geopolitics. We cannot avoid hotspots around the world, and our judgments about the most likely or least likely geopolitical situations have changed.

These three things led to a firm and unanimous decision today.

Question 6

Financial Times, you said today’s decision removes a degree of accommodation, and perhaps if you could share your views at the negotiating table. Are interest rates now at the restrictive levels you described?

Walsh

Thank you? I have described before that I find it difficult to characterize financial conditions as restrictive. I think I said I find it hard. What I have heard in the past few days is that my colleagues also find it difficult to describe it that way. We have removed some accommodation so that financial and credit conditions are more aligned with our ultimate goals. That’s our decision. That’s our judgment, and we will continue to assess this prospectively.

Question 7

CNBC, I want to follow up on this question. Previously, most Federal Reserve officials described interest rates as moderately restrictive. If you have removed accommodation, can you tell us your perception of the federal funds rate relative to the neutral rate? If you don’t mind, do you have a short-term neutral rate and a long-term neutral rate, what do you think? In those respects?

Walsh

In a word, no. I want to say a few words. I have always been interested in the neutral rate, considering it an academic question. When I studied economics, we used to think of it as a "Wicksell" rate, the true equilibrium rate. This is useful academically. Does it have any operational impact on the decisions we made today? No, I don’t know.

Question 8

You have said you don’t like data dependence, including today. But leading up to this meeting, there was a lot of focus on the August CPI. I wonder if you think that’s appropriate for the market, or if you have considered how to communicate.

Walsh

Market participants and reporters, I think over the past decade or so, have become accustomed to holding their breath waiting for a data point. That’s not my view. I am not holding my breath waiting for any specific data, whether it’s today’s retail sales or last week’s CPI data. I just want to reiterate that trends are important. Data points are noisy, and data dependence is a dangerous focus. That’s not what I care about. Over time, the market will gradually understand how the Federal Reserve makes decisions, what is relevant, and what is not. I don’t want to edit that for them beyond that.

Question 9

I’m just curious, a few weeks ago, the president sent a message basically threatening to cut trade with certain countries unless rates were lowered. Clearly, the consistent decision was to do the opposite. What would you say to investors who see this as yet another test of Federal Reserve independence? When was the last time you spoke with the president? Do you expect there will be a post-decision meeting? Or.

Walsh

You gave me a long menu to choose from? They are all very tempting. Regarding discussions with the president, I have nothing to offer you, I am not a Wall Street communicator, part of Federal Reserve independence is that we stay our course. Independence is a two-way street. We will let those who make trade and fiscal policy stay their course as well. That’s how we stand here, calling them as we see them.

Question 10

Can you explain who the least affluent are, and what raising rates does when these people may be squeezed by higher mortgage rates, higher gas prices, higher grocery prices, and now broadly higher rates?

That’s a fair question. In macroeconomics, we tend to focus on the totals here, total Gross Domestic Product (GDP), overall labor market trends, the state of inflation. In Washington State, many people spend a lot of time on distributing outcomes, that’s their job and business. The least affluent I refer to are often those without financial assets, referred to as slightly below the national 50%, who have no equity in their homes. They have no equity in their 401(k) plans. So they live paycheck to paycheck.

Walsh

There are two things we can do that align with our mission. Ask ourselves, as a country that is more or less at full employment, we have achieved this, it doesn’t mean individuals are not looking for work. But overall, we are more or less at full employment. If that’s the case, we can look at the other side of our mission, making it our focus and stabilizing prices, an environment with an inflation rate consistent with our 2% target provides good news because when they get their paychecks, they can keep their heads above water and achieve real income growth. We are not entirely responsible for this, but we are responsible for stable prices. As I said before, inflation is a choice, and today we took a step toward achieving it.

Question 11

What are your views on the actions of the European Central Bank? They have raised rates twice this year, but not consecutively.

Walsh

Thank you. Well, I am not asking them to prejudge the decisions we are about to make, so I won’t prejudge the decisions they have made, but I will say this. I have spent some time with foreign central bank colleagues, not just over the past 20 years, but in the past few weeks. As I mentioned at the G20 meeting in Jackson Hole, we hosted a meeting of central banks in North Carolina and Basel.

What I hear from most developed economies is that they are also grappling with price pressures. They are making their own choices within their mandates. It tells me a few things. One is that when the Federal Reserve makes policy choices, it is important not only for the U.S. economy but also spills over to the rest of the world to a lesser extent. The same is true for them; when foreign central banks make decisions in the face of higher prices, they choose to raise rates in a manner consistent with their mandates, and they are helping to curb inflation in their countries. And there are spillover effects behind spillovers in both directions. Beyond that, I won’t comment on what other central banks may choose to do this week or afterward.

Question 12

Wall Street Journal, Chair, last fall you expressed concern that the Federal Reserve was about to make its sixth or seventh major mistake, believing the economy was too strong to justify a rate cut. Now, today, you have raised rates. Can you sense how your assessment of the U.S. economy has changed from then to now?

Walsh

So I don’t remember the full context, but I can tell you about the state of growth, Nick. Now, when I appeared 110 or 120 days ago, my guess is that the U.S. economy has also strengthened in the past few weeks. I think we now have broadly defined data indicating that the economy has indeed strengthened, the potential growth rate is higher, and inflation is the issue. Price stability has been the issue for over 5.5 years. Therefore, the committee decided today to take action to ensure we return to our price stability target more promptly. Price stability is the foundation of economic growth, and I believe we took an important step today. We did this in part by eliminating the accommodations I mentioned earlier.

Question 13

Long-term bond yields have risen significantly over the past few months, especially in the past few weeks. What do you think the bond market is telling you, particularly about growth prospects, neutral rates, and the implications for monetary policy?

Walsh

Let me talk about history, how bond market prices move. I want them to do that. I want them to tell me any story they want to tell. I want to try to interrogate that. But why have yields risen, say, from the last FOMC meeting to now? I will give you three reasons, but I will say these things are often overdetermined.

This is a complex set of issues that are affecting the most important assets in the world. One trillion dollars in government bonds, a type of risk-free asset, is related to almost every kind of asset in the world. So I would say three things. First is economic strength. We see that part of the reason for the rise in long-term yields in 2026 is the strengthening of the economy. The second reason, capital competition, the surge in capital spending, which I mentioned in my comments, is real, and the so-called mega-corporations are raising funds in the market. Therefore, capital competition is real. I think this partly explains the increase in yields.

The third is geopolitics, hotspots around the world are driving long-term yields. This is not just about the spot prices of energy or corn, soybeans, or wheat, but rather the differences between these spot prices and the so-called "crack spreads." This means what it signifies for products entering stores nationwide, and I think these are the three main explanations, but certainly not an exclusive list.

Question 14

You mentioned in Jackson Hole that you hope to see inflation decline clearly at a sufficient pace, which is a standard but not necessarily a measurable threshold. The reason I ask this question is that today you said today's policy actions will support a more timely return to the committee's 2% target. However, in the summary of economic forecasts, the median has pushed back the timeline for achieving the 2% target by another two years to 2029. I wonder how you reconcile these two things.

Waller

A simple way to address this issue is that those are not my forecasts. These are the forecasts of my 18 colleagues, and I am trying to responsibly represent them to you freely.

My job is not to provide forward guidance, but my commitment is to the American people, to anyone listening, to reiterate that we will achieve price stability. My commitment in July was to say that we want to buy a little time. We want to assess what is happening across a range of dimensions. What I said in Jackson Hole is that we are committed to discipline, not decision-making. Today's actions begin to show that we take this very seriously, and we will achieve the goal of price stability. As the statement says, we will do this on a more timely basis. This is our decision. As we continue to discuss in the coming weeks and months, we will have more to say, but I will not prejudge future actions.

Question 15

You have previously talked about the positive impacts that widespread adoption of artificial intelligence might bring. How concerned are you, if at all, that we are hearing increasingly alarming warnings from AI leaders that losing control over this powerful technology could cause real-world damage that might affect the real economy?

Waller

So I have spent a lot of time thinking about AI. Before I found this article, I spent a lot of time publicly discussing it. The independence of the Federal Reserve is about staying in our lane.

We are very concerned about what is happening with artificial intelligence. We are very focused on its impact on economic demand and ultimately on economic supply. I am very concerned. I think it is very important that we have established a special task force that should report by the end of the year to help us think about the implications for future policy situations. But policy decisions regarding risks and returns, challenges and opportunities are decisions made by other parts of the government. I will let them make those political decisions, those policy decisions. The impacts of those decisions clearly have some effect on our day-to-day work, and that is where we need to focus.

Question 16

Inflation is primarily due to rising energy prices and tariffs, and some believe this is a supply shock that cannot be resolved by interest rate hikes, as long as inflation expectations remain stable, it should self-correct. Now that your interest rates are high, do you need to push growth below potential levels, inadvertently weakening the job market to reduce inflation? Given the current AI-driven economy, how do these dynamics play out?

Waller

So there is a lot there. Let me see if I can’t do a little bit. First, we believe that the unemployment rate is essentially consistent with full employment. I do not think we need to harm the labor market to achieve our goals. I do not think the two parts of our mission—price stability and full employment—are mutually exclusive in the medium term. So economic growth, which is to ensure sustained, sustainable, and lasting economic growth, is what we are focused on, and it is the work we are doing today, and we will continue to ensure price stability, which means that sustainable, lasting economic growth can last longer. The economy can become stronger. As I mentioned earlier, the least affluent can benefit from this.