The Federal Reserve's first rate hike in three years, completed this week, may not be the primary source of market anxiety. The 25-basis-point increase itself is less concerning to investors than a specific phrase—"remove a dose of accommodation"—repeatedly used by Chair Kevin Warsh during the press conference. This language has sparked a significant question on Wall Street: if the Fed's action is only a partial unwinding of stimulus, not a genuine tightening, how many more rate increases could follow?
On Wednesday, the Federal Reserve raised its target range for the federal funds rate by 25 basis points to 3.75%-4.00%. Warsh explained that the U.S. economy appears to be "strengthening" and financial conditions have become less strained, providing room to dial back some policy support. Notably, he refrained from labeling the move as an outright "tightening" of monetary policy, instead describing it as removing "a dose of accommodation." This subtle shift in wording has quickly become one of the most closely watched policy signals from the meeting.
It’s Not a Slip of the Tongue: The Market Focuses on Warsh’s Key Term
According to Krishna Guha, head of economic and central bank strategy at Evercore ISI, "a dose of accommodation" stands out as the most hawkish element of Warsh’s entire press conference. What makes it more significant is that Warsh did not use the phrase just once; he repeated similar expressions across different questions. Guha suggests this appears to be a deliberate policy framework, markedly different from the language the Fed has used in recent years. It introduces a new possibility: the number of future rate hikes could be more open-ended than markets previously anticipated.
For over a decade, the Fed has assessed whether monetary policy is loose or tight by referencing the "neutral rate." Simply put, if the policy rate is well above the neutral rate, it is often seen as restrictive; if it is near or below the neutral rate, policy may still be accommodative or stimulative. Markets have used this benchmark to gauge how far rates are from neutral and where the hiking cycle might eventually end.
Warsh Dials Down the Neutral Rate, Making the Policy Endpoint Harder to Predict
Warsh, however, is clearly downplaying this traditional framework. During the press conference, CNBC’s Steve Liesman pressed him on how much the current 3.75%-4.00% range exceeds the neutral rate. Warsh responded that comparing the policy rate to the neutral rate is "useful academically" and can aid in thinking about monetary policy, but as for whether such estimates have an operational impact on the Fed’s current decisions, his answer was "no."
This stance implies that investors may no longer be able to simply use the distance from the neutral rate to forecast where the tightening cycle ends. Guha notes that, taken literally, Warsh’s remarks suggest the Fed may need to keep raising rates until the overall financial conditions faced by the private sector are no longer accommodative. The challenge lies in the unclear definition of when conditions are no longer loose, making the cycle’s endpoint increasingly ambiguous.
Wall Street Reprices Quickly: Probability of an October Hike Climbs to 58%
Following Warsh’s comments, market bets on the next policy move shifted rapidly. Goldman Sachs has already incorporated another rate hike in October into its forecast, while Bank of America also anticipates a move in October and further projects one in December. According to the CME FedWatch tool, as of Friday morning, the market-implied probability of an October hike had risen to nearly 58%, up from around 42% just a week earlier.
"In the Fed’s policy language, 'accommodation' essentially means stimulus," said James Egelhof, chief U.S. economist at BNP Paribas Securities. When Warsh says the Fed only removed a "dose of accommodation," the implication could be that, even after this hike, monetary policy remains broadly stimulative. Egelhof believes that with strong cyclical momentum and persistently high inflation, rates may need to rise significantly, with the total number of hikes potentially exceeding the three he currently expects.
Markets Even Start Pricing in Three to Four More Hikes
Signals from the rate futures market go even further. Current futures prices imply that the federal funds rate could approach 4.635% by the end of 2027. If this market pricing is realized, it would translate into roughly three to four additional 25-basis-point hikes from current levels. This scenario suggests the Fed may gradually reverse some of the cuts implemented under former Chair Jerome Powell.
Jack Janasiewicz, portfolio manager and chief strategist at Natixis Investment Managers Solutions, points out that the phrase "remove a dose of accommodation" reinforces the meeting’s overall hawkish tone and suggests the Fed may no longer view current policy as "mildly restrictive." However, he also cautions against interpreting this as the start of an aggressive new tightening cycle. In his view, the Fed is likely in the process of unwinding the "insurance cuts" implemented in the fall of 2025 to hedge against downside risks to the economy.
The Core Question: How High Does Warsh Intend to Push Rates?
The 25-basis-point hike this week may not be the most significant shift the market needs to digest. What matters more is that Warsh is altering how the Fed communicates its monetary policy stance. If one hike is merely "removing a dose of accommodation," how much accommodation remains in the current policy? And how many more doses must be removed before the Fed deems policy appropriately positioned?
With Warsh’s clear dismissal of the neutral rate’s role in practical decision-making, the conventional coordinates markets have used to navigate policy are becoming less reliable. This elevates the importance of the upcoming FOMC meetings in October and December. For Wall Street, the question is no longer just whether the Fed will hike again, but how far Warsh’s Fed is prepared to repricing rates, and whether the previous assumption that current policy was sufficiently restrictive needs a complete rethink.
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