Fed Shifts Course, Admits Past Underestimation of Economic Strength

The Federal Reserve has made a significant shift in its monetary policy stance, acknowledging that it had previously underestimated both the strength of the US economy and underlying inflationary trends. In September 2026, the Fed raised its short-term interest rate target band from 3.5-3.75% to 3.75-4%, with Chairman Kevin Warsh describing the move as 'remov[ing] a dose of accommodation'.

This change in sentiment is notable, given that most Fed officials had previously expected short-term interest rates to fall substantially by the end of 2025, with many anticipating rates to be as low as 3.25%. However, it now appears that almost all officials believe rates will be higher at the end of 2027 than they are today.

The shift in Fed officials' views cannot be explained by factors such as tariffs, which have had a negligible impact on inflation. Instead, it seems that officials have belatedly realized that underlying nominal growth continues to run too fast to be consistent with the central bank's alleged 2% yearly inflation target.