The Federal Open Market Committee (FOMC) held its policy meeting on September 15-16. The policy rate has remained within the 3.50% to 3.75% range for several months. The U.S. Consumer Price Index (CPI) rose 3.4% year-on-year in August, while the core CPI rose 0.3% month-on-month; the Personal Consumption Expenditures (PCE) CPI remained at 3.7% year-on-year in July. The unemployment rate remained at 4.1%, and non-farm payrolls increased by 162,000 in August. Interest rate futures have priced in a 25 basis point increase to around 90%. Market focus has shifted from whether interest rates will be adjusted to how the committee will assess the restrictive nature of the policy, how it will revise its summary of economic projections, and how Chairman Kevin Warsh will explain the policy response function.

The asymmetry of dual missions and the latest price structure

The Federal Reserve's statutory dual mandate is price stability and maximum employment. The current combination is asymmetrical: on the employment side, the unemployment rate is stable at 4.1%, non-farm payrolls increased by 162,000 in August, and the four-week moving average of jobless claims remains in historically low territory; on the price side, inflation continues to exceed the 2% target. The personal consumption expenditures price index rose 3.7% year-on-year in July, and approximately 4.1% six months annualized; the consumer price index (CPI) rose 3.4% year-on-year. The core CPI fell to 2.4% year-on-year, but still rose 0.3% month-on-month in August, indicating that the monthly momentum excluding food and energy has not converged to a pace compatible with 2%. Chairman Warsh gave a clear standard at the Jackson Hole symposium: "We must be confident that underlying inflation is clearly and rapidly approaching the target, otherwise the Committee has work to do." He also attributed the responsibility for the approximately 65 months of inflation exceeding the target to the central bank itself and reiterated that 2% is a "hard, fixed target." The structural indicators he listed were also tight: of the approximately 199 sub-items in the personal consumption expenditure basket, 54% saw increases exceeding 3% over the past 12 months, lower than the post-pandemic peak but still significantly higher than the pre-pandemic normal of approximately 32%. The coexistence of excessive inflation and relatively stable employment means the Committee finds it more difficult to use the downside risk to employment as the primary argument for remaining on hold in its mandate considerations. Another implication of the August data is the overlap of energy and core inflation. The Consumer Price Index (CPI) rose 0.4% month-on-month, gasoline rose 3.9% month-on-month and 27.4% year-on-year, with energy inflation widening year-on-year; diesel wholesale and retail prices rose simultaneously, indicating the time lag in the transmission of freight costs to end-products has not yet fully passed. The Middle East conflict pushed crude oil prices to around $100 per barrel, tilting the short-term inflation risk distribution to the right. The 0.3% month-on-month increase in core inflation does not mean that the "energy shock has been completely absorbed," as sub-items such as housing, airfares, and vehicles are still contributing to the monthly increase. The key is not to extrapolate single-month readings into trends, but to identify which category of indicators the committee will consider “potential inflation”: year-on-year levels, three- to six-month annualized rates, component diffusion, or service prices excluding housing.

Are policies truly restrictive: Constraints imposed by historical paths?

The target range for the federal funds rate has been maintained at 3.50% to 3.75% since the beginning of 2026. Compared to current inflation, nominal interest rates are not considered high. The annualized growth rate of US real GDP in the second quarter was 1.5%, and the job market did not experience a sustained rise in the unemployment rate. Short-term interest rates have remained near similar levels for an extended period, yet economic activity continues to keep the unemployment rate close to the Committee's assessment of sustainable employment. This set of facts has been used to challenge the assertion that "current interest rates are sufficiently restrictive." If restrictiveness were true, it would typically be accompanied by cooling demand, slower job creation, and a contraction in price diffusion; currently, the latter two are not present. Historical experience is not favorable for one-off adjustments. Over the past few decades, the Fed has followed up with a rate hike in the same direction approximately 85% to 90% of the time. One-off "braking" is relatively rare; the most recent example was a premature light tap in 1997, followed by a shift to easing after 1998. A 25-basis-point rate cut has a limited immediate impact on aggregate demand. However, monetary policy has a long lag, and the committee often needs to accumulate observable adjustments and wait for identifiable changes in output and prices before confirming that the course has been completed. The July meeting's vote of 9-3 to maintain the interest rate, with the heads of the Cleveland, Minneapolis, and Dallas regional Federal Reserve banks advocating for a 25-basis-point increase, indicates a division within the committee regarding the restrictive assessment. The June summary of economic projections provides the following references: a median personal consumption expenditure price index of 3.6% and a core index of 3.3% for 2026, real growth of 2.2%, an unemployment rate of 4.3%, and a median federal funds rate of 3.8% at year-end. If we reverse some of last year's rate-cutting path, the interest rate would only return to near the lower end of the range given by most Taylor rule variants. The dot plot of the summary of economic projections is a conditional forecast, not a commitment; its value lies in showing the "appropriate" interest rate position that participants consider under their respective scenarios, and whether the distribution is narrowing or widening. The market has priced in the meeting at around 90%, reflecting a revaluation of the statement's wording and the median dot matrix.

Summary of Economic Forecasts, Communication Methods, and Independence Testing

This meeting also includes an update to the Summary of Economic Projections. The market will compare this to the June version to observe whether the 2026 price forecast is revised upwards, whether the median interest rate at year-end rises, and whether the 2027 path continues to rise or falls back to a lower level by year-end. The Summary of Economic Projections only reports the interest rate point at the end of the calendar year; the "up then down" trajectory within the year is not shown on the chart. In the longer-term forecasts, inflation returning to 2% and policy rates returning to neutral are built-in structures in the table in recent years, with limited signal content. The truly informative aspects are in the near term: whether participants still consider excessive inflation as the main gap, and whether the lattice dispersion has widened due to the energy shock. Communication itself has become a policy variable. In his first two press conferences after taking office, Warsh deliberately reduced forward guidance and didn't elaborate much on his own reaction function, leaving the market to fill the gaps with interest rate futures. He also stated in Jackson Hole that central bank tools are powerful, but "the market should not be allowed to base its next trade on speculation about central bank statements." Interest rate futures price what the market believes the committee will do, not what the committee should do. Policy responsibility lies with the committee, not the futures curve. Governor Waller stated in early September that if August data proves the previous easing was only temporary, a policy rate hike at the September 15-16 meeting would be "appropriate." This aligns with the chairman's standard of "approaching the target quickly enough," constituting a stress test for the post-meeting Q&A. Independence issues overlap with the political cycle but cannot replace data-driven logic. With the midterm elections approaching, mortgage rates remaining high, and energy prices increasing the cost of living, the administration naturally favors easing. For the committee, aligning actions with the 2% target means putting "verbal hawkishness" into verifiable policy statements. After holding rates steady in July with three dissenting votes, if the statement continues to emphasize price stability, the market will focus on whether the voting split widens, whether the summary forecast is revised upwards, and whether the chairman is willing to clarify which conditions future decisions will be based on. If these conditions remain ambiguous, volatility will shift from the interest rate decision itself to the wording differences in the post-meeting Q&A.