Last week, the Federal Reserve's rate-setting Federal Open Market Committee unanimously approved a quarter-point interest rate increase, the first such hike since 2023. This action immediately pulled up rates on mortgages and other consumer debt. The yield on the 10-year Treasury has risen above 5%.
Inflation, measured by the Fed's preferred personal consumption expenditures indicator, was running at 3.7% in July. It has remained above the central bank's 2% target for more than 5½ years. Chairman Kevin Warsh, leading the Fed, has implemented visible but largely cosmetic changes, such as shortening news conferences and altering reporter seating arrangements.
These superficial adjustments mask a deeper, more profound shift in how Warsh approaches monetary policy. He focuses intensely on a broad array of financial and market indicators.
Who Pays the Price
The working class bears the direct cost of these policy decisions. The rising 10-year Treasury yield translates directly into higher payments for homeowners and those carrying consumer debt. Meanwhile, the cost of living continues its upward trajectory.
The Bloomberg Commodity Index is up more than 30% this year. Some energy products, like diesel, have risen by 83%. These increases in essential commodities further erode the purchasing power of wages, forcing workers to pay more for basic necessities while their debt obligations grow.
Warsh himself dismissed the idea of describing the funds rate as accommodative, neutral, or restrictive. He called the concept "useful academically" but irrelevant to the decision to hike. Economist Claudia Sahm criticized this stance, noting Warsh framed the decision as 'removing a dose of accommodation' yet distanced himself from the concept defining it. This linguistic maneuvering obscures the material impact of the Fed's actions on everyday people.
Managing Capital's Interests
While workers face tightening credit and rising costs, capital continues to thrive. The stock market remains buoyant. The labor market is described as robust, serving capital's need for available workers. Most financial conditions indicators continue to show little restraint, and growth looks strong.
Warsh's own assessment, based on his suite of market indicators, concludes that "money is easy" for the banking and financial systems. He noted, "Credit and loan markets are showing few signs of policy restraint," which helps explain the growth in loans seen this year. This ensures continued access to capital for those who already possess it.
Warsh's focus on "financial conditions" includes scrutinizing asset prices, Treasury securities, the foreign exchange value of the dollar, credit availability, and commodity prices. These indicators, he states, "should inform the Fed's near-term outlook on economic activity and inflation throughout the business cycle." This framework prioritizes the stability and profitability of financial markets over the material conditions of the working class, ensuring that accumulated wealth is protected from inflationary pressures.
The State's Hand
The Federal Reserve, as a key state apparatus, acts to manage the contradictions of the capitalist system. Warsh's long-standing priority to cut the Fed's $6.7 trillion balance sheet, a policy he advocated for since at least 2011, has been slow to materialize. He quit his first stint on the Fed's board 15 years ago due to discomfort with the balance sheet's growth, though he voted for its expansion out of "loyalty to the institution."
Now back in control, Warsh still faces internal resistance from other Federal Open Market Committee voters. They are reluctant to move quickly on balance sheet cuts. They prefer to wait for task forces to report back early next year. This reluctance highlights the state's cautious approach to avoid disrupting the flow of capital, even when one of its key figures advocates for a change.
The immediate need to address prices, with inflation high and oil surging, made it an "inopportune time" to experiment with balance sheet reduction, according to the committee. This further illustrates how the state prioritizes market stability over fundamental structural shifts that might challenge accumulated wealth.