Will the Federal Reserve only raise interest rates once? "Master" Greenspan disagrees.
2026-09-18 01:36:09
Federal Reserve Chairman Kevin Warsh presided over the first U.S. interest rate hike since 2023 on Wednesday. There's a well-known saying: rate hikes often come in waves. Former St. Louis Federal Reserve Bank President Jim Bullard and former Federal Reserve Vice Chairman Richard Clarida, among others, repeatedly emphasized this observation before the rate hike decision was announced. Market pricing also confirmed their judgment: swap traders expect the Fed to raise rates approximately three more times by the end of 2027. 
This rule of thumb has some merit in the logic of financial market operations: in most cases, a single 25 basis point interest rate adjustment is unlikely to have a significant impact on the bond market, the financial environment, or even the overall economy. However, there is a clear exception to this rule—in March 1997, Alan Greenspan, known as a "master," implemented a "one-time" rate hike within a cycle. This case is highly similar to the current situation, illustrating that some economies need fine-tuning, even seemingly insignificant, policy adjustments. A survey of policymakers released concurrently with this decision showed that the median expectation among surveyed officials is that the Federal Reserve will most likely raise interest rates once more before the end of 2026. The survey covered 18 presidents of regional Federal Reserve banks and members of the Board of Governors, but the Chairman himself was not included in the statistics. However, the vast majority of respondents also acknowledged that there is considerable uncertainty in inflation forecasts. At the press conference following the decision, when asked about the subsequent policy path, Warsh was cautious in his wording: "I will not prejudge any of our future decisions." So, are multiple rate hikes really a foregone conclusion? Let's start with the basic facts. Throughout the modern history of the Federal Reserve, almost every rate hike cycle began in an environment of extremely low interest rates following an economic recovery from recession, giving policymakers ample room to raise rates. Only 1997 and the present are exceptions, with interest rates already in the 3.75%-4% range. Like the "master" Greenspan, the new Chairman Warsh is currently in a phase of fine-tuning policy. Excluding short-term disturbances such as oil price fluctuations, core inflation may have fallen to 2.3%-2.7%. This level is above the 2% inflation target, but far from out of control. However, Warsh faces the challenge that inflation has been above target for five and a half years, and the cooling process has stalled. A small rate hike may be needed to restart the downward trend seen in 2022-2024. Greenspan faced a similarly delicate policy calibration dilemma: strong economic growth and a significant decline in the unemployment rate. Policymakers worried about an overheated economy, which could push up inflation in the future. Although inflation was still manageable at the time of the interest rate hike, the Fed's internal models predicted that core CPI would rise moderately to about 3.2% in 1998 due to a tight labor market. Another similarity: Warsh was facing the potential technological revolution brought about by artificial intelligence. AI was expected to boost productivity and drive economic growth, and would also rewrite the market's inherent understanding of the logic behind interest rate movements. Greenspan, on the other hand, had to deal with the nascent internet revolution. When the underlying logic of the economy changes, policymakers find it difficult to define what interest rates are "restrictive," "neutral," or "accommodative." The Fed's raising of the neutral interest rate (the theoretical equilibrium rate that neither stimulates nor inhibits the economy) to 3.2%, a ten-year high, fully reflects the exploratory state of policymakers. This internal Fed survey also indicated that officials might slow the pace of interest rate declines from their peak to the neutral level. In reality, productivity-driven economic growth brings uncertainty to interest rates: it may suppress inflation on the one hand, and push up borrowing demand on the other. In 1997, the Interest Rate Committee also publicly discussed the impact of the quiet rise in the neutral interest rate. Richmond Fed President Alfred Broads told Greenspan at a meeting, "If monetary policy fails to capture changes in the equilibrium environment and does not raise nominal interest rates, then even if nominal interest rates remain unchanged, we are already effectively easing monetary policy."3 This statement, even when read in September 2026, is remarkably relevant to the current situation. Furthermore, the Fed's rate hike on Wednesday was also intended to maintain its credibility. Warsh was appointed by Donald Trump, who is considered the most interventionist US president in modern history. Since Warsh took office, there have been constant questions about his ability to maintain policy independence, regardless of the fairness of these questions. In recent weeks, the market widely expected a rate hike, but Trump publicly called for a rate cut. If the Fed had held back, it would have been perceived that Warsh was compromising with the president under pressure from the November midterm elections. The Fed under Greenspan also deeply understood the importance of credibility. After a tightening period in 1994-1995, the Fed refrained from using interest rate hikes for a long time. St. Louis Fed President Thomas Meltzer stated at the meeting, "My economic assessment tells us that the credibility of our hard-won commitment to combating inflation is at risk of being damaged." Greenspan garnered much praise, and Warsh himself highly praised him: Greenspan had proactively predicted that inflation would remain under control and refused to stifle a thriving economy in order to suppress inflation. However, Greenspan also had a stroke of luck: a sharp drop in global energy prices, a strong dollar lowering import costs, and the institutional prestige built by his predecessor, Paul Volcker, all contributed to his success. It's worth noting that Greenspan and his colleagues initially did not intend to raise interest rates only once in 1997. However, in subsequent meetings, he formed the judgment that "productivity can suppress inflation." Then, in 1998, Russia defaulted on its debt, and Long-Term Capital Management collapsed, prompting the Fed to begin a rate-cutting cycle. So, what was the significance of this small rate hike? By maintaining the Fed's credibility through this rate hike, Warsh gained control over low-cost policy options. If the economic situation necessitates further increases, he can continue to raise interest rates. However, his target interest rate level may already be nearing its end. If he has a bit of Greenspan's luck, then this round of interest rate hikes may have already reached its conclusion.
This rule of thumb has some merit in the logic of financial market operations: in most cases, a single 25 basis point interest rate adjustment is unlikely to have a significant impact on the bond market, the financial environment, or even the overall economy. However, there is a clear exception to this rule—in March 1997, Alan Greenspan, known as a "master," implemented a "one-time" rate hike within a cycle. This case is highly similar to the current situation, illustrating that some economies need fine-tuning, even seemingly insignificant, policy adjustments. A survey of policymakers released concurrently with this decision showed that the median expectation among surveyed officials is that the Federal Reserve will most likely raise interest rates once more before the end of 2026. The survey covered 18 presidents of regional Federal Reserve banks and members of the Board of Governors, but the Chairman himself was not included in the statistics. However, the vast majority of respondents also acknowledged that there is considerable uncertainty in inflation forecasts. At the press conference following the decision, when asked about the subsequent policy path, Warsh was cautious in his wording: "I will not prejudge any of our future decisions." So, are multiple rate hikes really a foregone conclusion? Let's start with the basic facts. Throughout the modern history of the Federal Reserve, almost every rate hike cycle began in an environment of extremely low interest rates following an economic recovery from recession, giving policymakers ample room to raise rates. Only 1997 and the present are exceptions, with interest rates already in the 3.75%-4% range. Like the "master" Greenspan, the new Chairman Warsh is currently in a phase of fine-tuning policy. Excluding short-term disturbances such as oil price fluctuations, core inflation may have fallen to 2.3%-2.7%. This level is above the 2% inflation target, but far from out of control. However, Warsh faces the challenge that inflation has been above target for five and a half years, and the cooling process has stalled. A small rate hike may be needed to restart the downward trend seen in 2022-2024. Greenspan faced a similarly delicate policy calibration dilemma: strong economic growth and a significant decline in the unemployment rate. Policymakers worried about an overheated economy, which could push up inflation in the future. Although inflation was still manageable at the time of the interest rate hike, the Fed's internal models predicted that core CPI would rise moderately to about 3.2% in 1998 due to a tight labor market. Another similarity: Warsh was facing the potential technological revolution brought about by artificial intelligence. AI was expected to boost productivity and drive economic growth, and would also rewrite the market's inherent understanding of the logic behind interest rate movements. Greenspan, on the other hand, had to deal with the nascent internet revolution. When the underlying logic of the economy changes, policymakers find it difficult to define what interest rates are "restrictive," "neutral," or "accommodative." The Fed's raising of the neutral interest rate (the theoretical equilibrium rate that neither stimulates nor inhibits the economy) to 3.2%, a ten-year high, fully reflects the exploratory state of policymakers. This internal Fed survey also indicated that officials might slow the pace of interest rate declines from their peak to the neutral level. In reality, productivity-driven economic growth brings uncertainty to interest rates: it may suppress inflation on the one hand, and push up borrowing demand on the other. In 1997, the Interest Rate Committee also publicly discussed the impact of the quiet rise in the neutral interest rate. Richmond Fed President Alfred Broads told Greenspan at a meeting, "If monetary policy fails to capture changes in the equilibrium environment and does not raise nominal interest rates, then even if nominal interest rates remain unchanged, we are already effectively easing monetary policy."3 This statement, even when read in September 2026, is remarkably relevant to the current situation. Furthermore, the Fed's rate hike on Wednesday was also intended to maintain its credibility. Warsh was appointed by Donald Trump, who is considered the most interventionist US president in modern history. Since Warsh took office, there have been constant questions about his ability to maintain policy independence, regardless of the fairness of these questions. In recent weeks, the market widely expected a rate hike, but Trump publicly called for a rate cut. If the Fed had held back, it would have been perceived that Warsh was compromising with the president under pressure from the November midterm elections. The Fed under Greenspan also deeply understood the importance of credibility. After a tightening period in 1994-1995, the Fed refrained from using interest rate hikes for a long time. St. Louis Fed President Thomas Meltzer stated at the meeting, "My economic assessment tells us that the credibility of our hard-won commitment to combating inflation is at risk of being damaged." Greenspan garnered much praise, and Warsh himself highly praised him: Greenspan had proactively predicted that inflation would remain under control and refused to stifle a thriving economy in order to suppress inflation. However, Greenspan also had a stroke of luck: a sharp drop in global energy prices, a strong dollar lowering import costs, and the institutional prestige built by his predecessor, Paul Volcker, all contributed to his success. It's worth noting that Greenspan and his colleagues initially did not intend to raise interest rates only once in 1997. However, in subsequent meetings, he formed the judgment that "productivity can suppress inflation." Then, in 1998, Russia defaulted on its debt, and Long-Term Capital Management collapsed, prompting the Fed to begin a rate-cutting cycle. So, what was the significance of this small rate hike? By maintaining the Fed's credibility through this rate hike, Warsh gained control over low-cost policy options. If the economic situation necessitates further increases, he can continue to raise interest rates. However, his target interest rate level may already be nearing its end. If he has a bit of Greenspan's luck, then this round of interest rate hikes may have already reached its conclusion.
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