Fed watching isn't the most productive use of our time. We're busy managing client portfolios and building relationships. And the Fed's real power has always come from talking, not doing. Talk that moves market participants to act in a way that produces the outcome the Fed wanted in the first place.
In the Warsh Fed, forward guidance isn't really a thing. Warsh announced at his first meeting in June that the Fed would drop the practice.[^1] His reasoning was that markets work better reacting to incoming data than guessing how the Fed will react to it. So the Fed says less and telegraphs less. The rest of us react. Or not. After all, the Fed isn't quite the powerful institution it once was.
I've written about fiscal dominance before. To summarize: fiscal dominance is when government debt and deficits get so large that the central bank loses its ability to fight inflation independently. It ends up making decisions based on what the government's finances need rather than what the economy needs.[^2] That's the world we live in now, and in that world the Fed is caught between a rock and a hard place.
The danger is that the Fed misreads where it is. In Volcker's day, raising rates with strong job growth and inflation above consensus made obvious sense. Higher funds rates slowed lending and credit creation, which slowed growth and cooled prices. Under fiscal dominance, the logic may flip. Raise rates to fight inflation, and you might add to it. Higher rates raise the government's interest expense on an already large debt. They also pay savers more, and retirees sitting on cash spend some of that income back into the economy.[^3]
I want to be careful here, because this is a minority view rather than settled economics. Households are large net borrowers as well as savers, and most work on the question still finds that higher rates slow the economy on balance.[^4] But at current debt levels the interest expense channel is big enough that the question deserves asking, and I don't think the Fed has a confident answer to it.
Which brings us to Wednesday. Futures markets are pricing roughly 90% odds of a quarter-point hike.[^5] The ten-year Treasury crossed 5% on Monday for the first time since 2023.[^6] August CPI accelerated, oil is climbing on the Iran conflict, and employers added 162,000 jobs last month.[^7] On the traditional framework, the case for a hike is straightforward.
The decision itself is close to fully priced, so the interesting material is elsewhere. This is a Summary of Economic Projections meeting, so we get an updated dot plot alongside whatever the committee decides.[^8] That's where the committee has to show its hand about the path, and with forward guidance gone it's most of what we're going to get.
The harder problem sits with Congress rather than the Fed. Closing the deficit requires decisions that carry real political cost, and neither party has an incentive to campaign on them. So spending continues, and that leaves the bond market and the dollar to do the adjusting. A ten-year at 5% is one way that adjustment shows up. Part of that number is lenders asking more to fund the government. Part of it is energy-driven inflation expectations and repriced policy odds. But the trend has been up for months, and I think the direction tells us something.
What to watch: whether long rates keep climbing after the decision. If the Fed hikes and the ten-year goes higher anyway, that's the bond market telling us this isn't a normal tightening cycle.
Sources
[^1]: Warsh announced the end of forward guidance at his first FOMC press conference, June 17, 2026. Verify the quote against the Fed's official transcript before publishing.
[^2]: The formal case dates to Sargent and Wallace, "Some Unpleasant Monetarist Arithmetic," Federal Reserve Bank of Minneapolis Quarterly Review, 1981.
[^3]: The interest income channel is developed in John Cochrane's *The Fiscal Theory of the Price Level* (2023) and has been argued for the current US setting by Lyn Alden, among others.
[^4]: For the mainstream framing, in which elevated debt raises inflation risk through demand, expectations, and crowding-out rather than by inverting the sign of rate policy, see the Yale Budget Lab, "The Inflationary Risks of Rising Federal Deficits and Debt."
[^5]: CME FedWatch, September 14, 2026. **Re-check the morning of publication.** This figure was near 56% after Jackson Hole in late August.
[^6]: Reuters, September 14, 2026. The ten-year touched 5% intraday and reversed; confirm the close before citing.
[^7]: August CPI and the 162,000 payroll figure are Bureau of Labor Statistics releases. Verify both against BLS directly rather than press coverage.
[^8]: FOMC meeting September 15 to 16, 2026. SEP and dot plot release accompanies the statement.