12–0: The Fed Sends a Message

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Introduction: A Quarter Point and a Much Bigger Message

For the first time in more than three years, the Federal Reserve raised interest rates this week, increasing the federal funds target range by 25 basis points to 3.75%–4.00%.

That was certainly big news. But I don’t think it was the biggest news.

The bigger story was the vote: 12–0.

No dissents. Every voting member of the Federal Open Market Committee supported the increase. That is particularly notable at a time when the Federal Reserve’s independence has been under intense political scrutiny.

To me, the unanimous vote sent a clear message. The Fed will make monetary policy based on its mandate, not political pressure. The economy remains strong, the labor market is holding up, inflation remains too high, and the Fed intends to do something about it.

The Fed’s statement was direct: “The Committee will deliver price stability.”

Warsh’s Key Takeaways: Inflation Is the Problem

The Fed believes the economy has strengthened. Economic activity is expanding at a solid pace, domestic spending remains resilient, productivity growth is strong, capital investment is robust, and unemployment has changed little.

The problem is inflation.

Inflation has remained above the Fed’s 2% target for years, and with employment conditions remaining solid, price stability has clearly become the greater concern.

The Fed’s updated projections or dot plot reinforce that message. Policymakers now project 2026 economic growth of 2.3%, unemployment of 4.1%, PCE inflation of 3.7%, and core PCE inflation of 3.4%. Inflation isn’t projected to return to 2% until 2029.

In other words, the Fed isn’t raising rates because the economy is falling apart. It is raising rates because the economy has remained strong while inflation remains too high.

Warsh also described the move as removing monetary accommodation, which provides an interesting clue about where the Fed believes interest rates are relative to “neutral.”

The neutral rate is the theoretical interest rate at which monetary policy is neither stimulating nor restricting the economy. Nobody knows exactly where it is, which naturally means economists enjoy debating it endlessly.

But if the Fed believes it is still removing accommodation, the obvious question becomes: How high do rates need to go before monetary policy becomes restrictive enough to bring inflation sustainably back to 2%?

No Forward Guidance, Except for That Dot Plot Over There

This is where the Warsh Fed gets particularly interesting.

Warsh has made clear that he isn’t a fan of extensive forward guidance and has been reluctant to prejudge future rate decisions. He would rather let incoming economic data and financial markets do more of the talking.

The rest of the Fed, however, still publishes projections.

And those projections are saying something.

Sixteen of 18 policymakers currently expect at least one additional rate increase this year. The median projection puts the federal funds rate at 4.1% at the end of 2026, 4.1% in 2027, 3.9% in 2028, and 3.6% in 2029.

So, we have a Fed chairman who doesn’t particularly like forward guidance presiding over a Federal Reserve that just published several years of interest-rate projections.

Welcome to monetary policy.

Market Reaction: The Bond Market Nods

The initial market reaction was mixed. Short-term Treasury yields rose following the announcement while longer-term yields initially declined, as investors digested both the rate increase and the prospect of additional tightening.

By Thursday, Treasury yields had eased, with the 10-year falling back below 5%, while stocks rebounded. The S&P 500 gained about 1.1% and the Nasdaq rose approximately 1.7%. Falling oil prices and economic data also contributed to the move, so attributing Thursday’s entire rally to the Fed would be a stretch.

Still, the bond market’s reaction was interesting.

Long-term yields have risen substantially as investors wrestle with persistent inflation, federal deficits, higher oil prices and geopolitical uncertainty. A Federal Reserve willing to raise rates despite political pressure may provide some reassurance that it remains committed to price stability.

Not everyone thought 25 basis points was enough. Some market observers argued the Fed should have gone 50.

Apparently, a unanimous rate hike wasn’t hawkish enough for everyone.

Members Wealth Commentary: Risks and Opportunities

For investors, higher interest rates create both risks and opportunities.

With bond yields near multi-year highs, investors are finally being compensated meaningfully for taking interest-rate risk. For appropriate portfolios, we believe this makes extending duration increasingly attractive.

Higher rates can also create tax-planning opportunities. Bonds purchased when interest rates were lower may now be trading below their purchase price. In taxable accounts, we may be able to sell those securities, realize the loss, and reinvest the proceeds into bonds with similar characteristics and interest-rate exposure.

This allows us to maintain the portfolio’s intended bond exposure while potentially creating tax losses that can offset capital gains elsewhere. If interest rates eventually decline, as the Fed’s longer-term projections suggest, those replacement bonds may also appreciate as yields fall.

That’s tax-loss harvesting doing exactly what it is supposed to do: turning market volatility into a potential planning opportunity.

The more difficult question is what higher rates mean for stocks.

Higher rates increase borrowing costs and create more competition for investor dollars. At some point, they can become a headwind for economic growth and stock valuations.

But there are also plenty of positives. As I discussed in my recent article, Too Expensive to Buy, Too Strong to Ignore?, the economy remains resilient, productivity is improving, capital investment is robust, and corporate earnings have been very strong.

As long as earnings remain strong, we believe markets can continue to grind higher.

That doesn’t mean ignoring risk. After three plus years of strong market returns, some investors may now have considerably more equity exposure than they originally intended. Taking some profits and rebalancing portfolios toward their intended risk levels isn’t necessarily a prediction that markets are about to fall.

It’s simply disciplined portfolio management.

Conclusion: The Fed Sends a Message

The 25-basis-point increase made the headlines.

I think the 12–0 vote told us more.

The economy remains strong. Employment is solid. Inflation remains too high. And every voting member of the Federal Reserve agreed that tighter monetary policy was appropriate.

To me, the Fed unanimously reaffirmed two things this week: its commitment to price stability and its independence.

Where rates ultimately settle remains an open question. Warsh isn’t particularly interested in giving us the answer in advance, and markets will continue trying to figure it out.

At Members Wealth, we don’t need to predict every Fed meeting. Through Wealth Done RITE, Risk, Investments, Tax and Estate, we focus on what we can control: appropriate risk levels, diversification, portfolio construction, opportunistic rebalancing, tax efficiency, and adapting as markets and our clients’ lives change.

Higher rates create risks, but they also create opportunities.

Our job is to recognize both.