Warsh's Hawkish Stance Confirmed — UBS: The Reaction Function Has Fundamentally Shifted
nashnova research
The Fed voted unanimously to hike 25 bp to 3.75%-4.00%, with Chair Warsh anchoring the decision to three hawkish variables; UBS concludes his reaction function has fundamentally diverged from the past four decades, with rate-path risks skewed clearly higher.
Why is this hike being called "walking the talk"?
The Fed on September 17 voted 12-0 to raise rates 25 bp to 3.75%-4.00%.
The move matched the hawkish tone Chair Kevin Warsh set at Jackson Hole — he signaled tightening, then delivered it.
UBS economist Jonathan Pingle's team immediately characterized the decision as a systemic signal of Warsh's policy framework, not a routine hike.
What three variables drove the decision?
A strong labor market — the August jobs report provided direct confirmation.
An uncomfortable inflation trend — recent CPI data offered no positive signal.
Geopolitical risk and energy prices — Warsh said "hotspots around the world are in plain sight" and that the Fed's assessment of likely outcomes has changed.
This means → all three variables pointed the same way: none supported a pause.
What does UBS mean by a "shifted reaction function"?
A reaction function — the decision logic a central bank uses to adjust rates in response to economic signals — has, in Warsh's version, three distinct features, per UBS.
Indifferent to market selloffs: stocks fall, he doesn't flinch. Neither Jackson Hole nor this press conference showed concern. In plain terms = past Fed chairs might hesitate when markets plunged; Warsh won't.
Indifferent to labor-market damage: Warsh said he "doesn't think he needs to hurt the labor market to achieve the goal." UBS reads this differently — he believes higher rates simply won't materially hurt employment, so this isn't "protecting jobs" but "jobs can handle it."
A higher bar for "restrictive": Warsh stressed multiple times that current financial conditions are "not restrictive" and this hike only removed "a dose of accommodation." This means → he is willing to push rates higher and hold them longer.
Why does the phrase "second round effects" matter?
Warsh used the term "second round effects" at the press conference — the chain reaction where a supply shock like an oil-price spike feeds through to wages and broader prices.
This reflects a stance fundamentally different from the past: some historical thinking held that energy shocks fade on their own and central banks can "look through" them. Warsh chose to lean in, aiming to press inflation back to target.
UBS notes this language is closer to the European Central Bank's policy vocabulary than to the Fed's traditional framework.
What does the dot plot reveal?
The median dot projects one more hike this year, with a 4.1% rate median running through all of 2027.
The longer-run dot — the theoretical "normal" rate when the economy is in balance — edged up only from 3.1% to 3.2%. But the actual path officials wrote down — 4.1% in 2027, 3.9% in 2028, 3.6% in 2029 — sits above that equilibrium across the entire forecast horizon.
In plain terms = the "normal" rate on paper is 3.2%, yet every year's actual projection is 3.6% or higher. This means → officials privately believe achieving price stability requires rates well above the stated long-run level.
Where do rates go from here?
UBS base case: skip in October, hike 25 bp in December, hold through 2027, then begin cutting in June.
But UBS is explicit: after this press conference, the risks to that path are skewed clearly higher — rates could end up above forecast, and cuts could come later.
Warsh's own words: "My job isn't to provide forward guidance… today's action begins to show we're serious." This reflects a deliberate choice to preserve maximum policy flexibility and refuse to be boxed in by market expectations.
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