Market Commentary: September 23, 2026

Timothy A. Hoyle, Chief Investment Officer
thoyle@haverfordquality.com

The Fed's Credibility Test  

The Federal Reserve's latest rate hike was not simply about inflation. Chairman Kevin Warsh's reputation for independence was also on the line, with some experts calling the Fed's policy move a "credibility hike." Without the overwhelming pressure of market expectations, would the Fed still have tightened interest rates? We believe yes, and an analysis of some of Warsh's most meaningful recent remarks provides insight.  

Inflation is the Fed's top concern

During his September press conference, Chairman Warsh emphasized that policymakers are focused on acting against inflation "on a timelier basis" rather than waiting for price pressures to become embedded in the economy. If there was any remaining doubt that the Fed is currently more focused on inflation over employment, Warsh's comments were clear: "Today's policy action will support a timelier return to the Committee's 2 percent goal. This Committee will deliver price stability."​

The U.S. economy is stronger than many expected

Fortunately, the labor market provides some cover to allow the Fed to focus on reining in inflation. While the U.S. economy is not adding a significant number of jobs or growing the workforce quickly, continuing jobless claims are below historical averages even as the employment base is larger and the unemployment rate remains near 4%.

U.S. Continued Claims (Insured Unemployment)

September 5, 2024 – September 5, 2026

In addition to the jobs market, Warsh painted a surprisingly optimistic picture of economic conditions, highlighting strong productivity gains, robust business investment, and resilient consumer spending. He said the economy continued to perform well despite geopolitical uncertainty and external shocks.

Financial conditions are not restrictive

In one of his most telling comments, Warsh stated, “I would be hard-pressed to describe broad financial conditions as restrictive. This view was widely shared by the committee. So, we removed a dose of accommodation.” This is an important signal because it suggests that the Fed believes there is room to tighten policy further if inflation fails to improve.

The inflation problem is a yield problem

While the Fed moved last week to combat inflation by raising short-term rates, longer rates have been rising since February, measured by the 10-year Treasury yield. In his press conference, Warsh outlined three reasons for rising yields:

“…first is economic strength. Part of the reason why we’ve seen over the course of 2026, long-term yields go up is the economy is strengthened. Second reason, competition for capital. The surge in capital expenditures, which I referenced in my remarks, is real, and the so-called hyperscalers are out in the market raising funding, and so the competition for capital is real and I think it partly explains the increase in yields. The third, is geopolitics. The situation hot spots around the world are driving long-term yields.”

Higher yields affect virtually every asset class, increasing mortgage rates, raising corporate borrowing costs, and pressuring equity valuations. At the same time, the current inflation backdrop features a meaningful supply-side component, aggravated by geopolitics. Supply constraints, limited refinery capacity, and thin inventories are causing diesel prices to surge, and the gap between diesel and gasoline prices to widen. With freight transportation accounting for a significant share of diesel consumption, higher diesel prices have the potential to ripple through supply chains and affect a wide range of goods and services.

U.S. Average On-Highway Diesel Prices

January 1, 2022 – September 18, 2026

Raising interest rates can suppress demand, but it cannot create additional refining capacity or lower geopolitical risk. However, if energy prices continue to rise, elevated headline inflation likely would influence broader inflation expectations. Hence, the rationale for Warsh’s comments and the Fed’s unanimous vote to raise rates.

Yet, Warsh’s challenge may be larger than managing inflation expectations. He must convince markets that inflation will ultimately move back to target while simultaneously demonstrating that the Fed is acting independently of political pressures. Credibility itself is now part of the policy equation.