The Breitbart Business Digest Weekly Wrap: Warsh Hiked Two Interest Rates

Welcome back to Friday!

This week was significant for the Fed. As many anticipated, the Federal Open Markets Committee (FOMC) increased the fed funds rate by a quarter percentage point. Alongside this, they provided a Summary of Economic Projections that indicates Fed officials are becoming more assured about economic growth and the job market. Interestingly, the media was on edge, likely expecting a dramatic reaction from Trump, but that never came. Maybe he’s actually on board with growth, even if it means slightly higher rates.

Alright, let’s dive in.

Kevin Warsh Lowered Long Term Rates

The Federal Reserve did raise interest rates this week. Or did they? They raised two specific rates: the overnight federal funds rate and the interest on reserves rate. However, the 10-year Treasury yield, which acts as a key benchmark for mortgages and corporate debt, hardly budged. It ended Thursday at 4.9470 percent, down from 4.9750 percent the previous Friday. By Friday afternoon, as we were finalizing this newsletter before our weekly escape to nature, the 10-year yield crept up to just under five percent, a smidge lower than where it stood when the FOMC made their announcement.

Oh, and the yield on the 30-year Treasury, which was quite the topic of conversation a week or two back, dropped a bit from last week’s close of 5.354 percent to 5.328 percent. So, longer-term rates actually decreased.

Higher for Longer

Perhaps the most crucial takeaway from the Fed meeting was a component of the Summary of Economic Projections (SEP) that often goes unnoticed. Namely, the Fed’s longer-run estimate for the fed funds rate. It’s well known that Fed chair Kevin Warsh isn’t particularly fond of the SEP and wishes it received less attention, but, well, we’re going to keep an eye on it for now. After all, if they’re placing dots on a chart, we’ll be watching!

This longer-run rate had been on a pretty steady decline for several years after it first appeared in 2012. This was during the times of “secular stagnation” and “savings glut.” Many influential economists, including nearly everyone at the Fed, believed that the natural interest rate, the one that aligns with full employment and price stability, was decreasing. It started at 4.3 percent back in 2012 and fell to 2.5 percent by 2019.

Then, oddly enough, it kind of leveled off. It was intriguing, really. This hinted that the Fed thought the fed funds rate should be just half a point above their inflation target. Looking at their GDP growth forecasts revealed that they were estimating it about 70 basis points higher than the actual growth rate. This perspective didn’t shift even during the pandemic or the post-inflation surge, which might explain why the Fed was a bit slow to react to the soaring inflation in the Biden era. They didn’t perceive low rates as a significant inflationary factor, assuming rates weren’t really that low, even when they were hovering near zero.

Recently, the longer-run rate projection nudged up to three percent in 2024, then stabilized until this summer. It increased to 3.1 percent in March and hit 3.2 percent in the last meeting.

Simultaneously, the median forecast for the unemployment rate for this year and the next couple of years was adjusted downward, while growth forecasts ticked upward. Core PCE inflation was bumped up by 0.1 percentage point for 2026, stayed the same for 2027, and rose by another 0.1 percentage point in 2028. They still maintain a longer-run inflation estimate of 2.0 percent. What this tells us is that the Fed now believes the fed funds rate should be 1.2 percentage points above the inflation target—more than twice what it was between 2019 and 2024. This all indicates stronger economic forecasts and an upward momentum for real rates, although the PCE inflation estimates remain relatively unchanged.

More Growth, Less Unemployment

The SEP also revealed that Fed officials now anticipate enhanced economic growth and reduced unemployment.

When the Fed first started including GDP growth forecasts in 2015, it had a long-term projection of two percent. By September of the following year, they revised it down to 1.8 percent, and it pretty much stayed there until this March, when it finally shifted to 2.0 percent. This might feel like a minor tweak, but over a decade, it’s significant for the U.S. economy’s scale.

This shift holds additional weight because Fed officials are aware that evolving immigration policies and retiring baby boomers are likely to result in reduced or even negative labor force growth in the coming years. While many economists criticized Trump’s immigration restrictions for potentially hindering growth, Fed officials now foresee more economic expansion. This suggests they believe productivity improvements will drive this growth, enhancing the overall per capita growth outlook compared to when they might have factored in population growth driven by immigration.

On a near-term basis, forecasts have also seen an upward adjustment. Back in June, the Fed projected real growth of 2.2 percent this year and 2.3 percent next year. They have now upped their estimates to 2.3 percent and 2.4 percent, respectively. Even as far out as 2028 and 2029, they anticipate growth rates above the long-term benchmark of two percent. It wouldn’t be a shock if that long-term estimate starts climbing again.

Interestingly, not a single Fed official in the SEP is anticipating risk to their growth projections. The only recorded risk is upside risk. This marks a first.

Warsh Breaks the Phillips Curve

During a press conference, Warsh emphasized that he doesn’t see the current business investments, capital expenditures, AI advancements, or low unemployment levels as inflationary. He treated the inflation discussion as distinct from growth, signifying he doesn’t subscribe to the Phillips Curve theory—that too much growth or employment leads to rising prices.

And it’s not just Warsh’s perspective. The median inflation projection for next year has significantly decreased with just one more hike being anticipated, while the unemployment rate is expected to remain steady alongside increasing growth. Non-inflationary growth seems to be making a comeback.

Trump Refuses to Follow the Liberal Media’s Script

President Trump has expressed a preference for lower interest rates. So, when it seemed certain the Fed would raise the fed funds rate, mainstream media eagerly anticipated what they thought would be a backlash from him against his newly appointed Fed chair.

This could have been a setup. Had Trump unleashed on Warsh over the rate hike, it would have painted him as oblivious to his own appointee’s position, raising accusations of jeopardizing Fed independence and even the principles of economics.

However, in a delightful twist, Trump sidestepped the trap. Instead, he demonstrated faith in Warsh. If you really listened closely, you could almost hear the collective sigh from financial reporters as they hastily adjusted their narratives depicting a rift between Trump and Warsh.

Breitbart Business History: The Stock Market Is Cooked

On September 18, 1873, Jay Cooke & Company shut down. This Wall Street firm, which had financed the Union’s victory in the Civil War, had depleted its resources funding the Northern Pacific Railway.

Cooke thrived by selling government bonds to the public, but railroad bonds proved trickier. Building railways required substantial funds long before they could start transporting customers, and Cooke’s firm had heavily invested in that endeavor. When financial trouble hit Europe, investors pulled out of American securities, making it challenging to finance railroads.

Cooke’s downfall sent shockwaves through investors, creditors, and depositors throughout the banking landscape. If someone who had backed the Union could fail, other bankers’ assurances didn’t provide much solace. Investors sold off securities, depositors withdrew cash, and banks struggled to keep up.

Just two days later, on September 20, the New York Stock Exchange closed its doors, with trading halted for ten days. Panic spread nationwide, causing at least 100 banks to collapse.

The temporary closure did little to ease the chaos. Even as trading resumed, turmoil persisted. Railroad bankruptcies escalated, businesses shuttered, and many workers lost their jobs. Within two years, a staggering 18,000 businesses had failed. The railroad boom, which had added an impressive 35,000 miles of track between 1866 and 1873, led to a depression that lingered beyond the immediate banking crisis, continuing to affect the country through the remainder of Grant’s presidency.