Will the Federal Reserve Raise Rates More Than Once? "Master" Greenspan Doesn't Think So

FXStreet, September 18 — What is the significance of this small rate hike? By implementing this rate increase to secure the Federal Reserve’s credibility, Walsh has gained the option to pursue low-cost policy choices. If economic conditions eventually require it, he can still continue to hike rates. However, his target rate may already be approaching its endpoint. If blessed with some of Greenspan's good fortune, this round of rate hikes may have already reached its conclusion.

Federal Reserve Chairman Kevin Walsh presided over the first U.S. rate hike of 2023 on Wednesday. There's an old saying among market watchers: rate hikes usually come in sets. Before this decision, former St. Louis Federal Reserve President Jim Bullard and former Fed Vice Chair Richard Clarida repeatedly circulated this view. Market pricing backed their judgment: swap traders expected the Fed to raise rates about three more times by the end of 2027.



This rule of thumb makes sense in the logic of financial markets: in most cases, a single 25 basis point rate adjustment is unlikely to have a significant impact on the bond market, broader financial conditions, or the overall economy. However, there are clear exceptions—March 1997, when Alan Greenspan, known as “the Maestro,” implemented a one-time rate increase within the cycle. This case is highly similar to the current situation: some economies require nuanced, even seemingly trivial, policy fine-tuning.

A policymakers’ survey released alongside the latest decision showed that the median expectation among respondents was for the Fed to raise rates again before the end of 2026. The survey covered 18 Fed regional bank presidents and Board governors, but did not include the chair himself. Nevertheless, the vast majority of respondents admitted that inflation forecasts are extremely uncertain. At the post-meeting press conference, when asked about the future policy path, Walsh was cautious in his wording: “I won’t pre-commit to any of our future decisions.” So, is it really a foregone conclusion that there will be multiple further hikes?

Let’s stick to the basic facts. Looking back over modern Fed history, almost all tightening cycles began after the economy had exited recession and interest rates were extremely low, giving monetary policymakers plenty of room to increase rates. Only 1997 and the current period are exceptions, with rates already in the 3.75%-4% range.

Like “the Maestro” Greenspan back then, the new chairman Walsh is now in a phase of policy fine-tuning. Setting aside short-term disruptions like oil price fluctuations, core inflation may have already fallen back to between 2.3%-2.7%. This level is above the 2% inflation target but is far from out of control. Yet, Walsh faces a challenge: inflation has exceeded the target for five and a half consecutive years, and the disinflation trend has stalled. A small rate hike may be required to restart the disinflation seen in 2022-2024.

Greenspan faced a similarly nuanced policy adjustment back then: economic growth was robust and the unemployment rate was declining significantly. Policymakers worried about the economy overheating and thus driving up inflation in the future. Although inflation was still manageable at the time of the hike, the Fed’s internal models predicted that due to the tight labor market, core CPI could rise moderately to around 3.2% in 1998.

Another parallel: Walsh is facing the potential technological shocks brought by artificial intelligence. AI is poised to enhance productivity, drive economic growth, and reshape the market’s established logic regarding interest rates. Back then, Greenspan had to contend with the dawn of the internet revolution.

When the fundamental logic of the economy changes, it becomes difficult for policymakers to determine what counts as “restrictive,” “neutral,” or “accommodative” interest rates. The Fed has raised its estimate of the neutral rate—the theoretical equilibrium rate that neither stimulates nor restrains the economy—to 3.2%, a ten-year high. This change fully reflects the policymakers’ exploratory stance. The Fed’s internal survey also indicates that officials might slow the pace of rate cuts from the peak to the neutral level. In reality, productivity-driven economic growth introduces uncertainty for interest rates: it can, on the one hand, contain inflation, but also increase the demand for borrowing.

In 1997, the rate-setting committee also openly discussed the impact of a muted rise in the neutral rate. At the meeting, Richmond Fed President Alfred Broaddus said to Greenspan: “If monetary policy fails to capture changes in the equilibrium environment and does not raise the nominal rate, then even if the nominal rate remains unchanged, we are essentially in an easing stance.” This point, reread in September 2026, fits today’s circumstances perfectly.

In addition, Wednesday’s Fed rate hike was also intended to preserve its credibility. Walsh was appointed by Donald Trump, the U.S. president with the strongest recent inclination to interfere with monetary policy. From the start of Walsh’s tenure, there have been persistent doubts about his ability to maintain policy independence—whether those doubts are fair or not. In recent weeks, as the market broadly anticipated a rate hike, Trump openly called for a rate cut. Had the Fed stayed put, the public might have believed that Walsh yielded to pressure from the president due to the November midterm elections.

Under Greenspan, the Fed also deeply understood the importance of credibility. After a tightening cycle in 1994-1995, the Fed went a long time without raising rates. St Louis Fed President Thomas Melzer stated at the meeting: “My economic judgment tells me our hard-earned anti-inflation commitment faces a risk of credibility loss.”

Greenspan garnered much praise, and Walsh himself admires him: Greenspan forecasted that inflation would remain manageable and refused to cripple a booming economy for the sake of suppressing inflation. However, Greenspan also had luck on his side: global energy prices plummeted, a stronger dollar lowered import costs, and his predecessor Paul Volcker had built up the Fed’s institutional reputation. All these tailwinds helped him. Notably, Greenspan and his colleagues did not initially intend to hike just once in 1997. But in later meetings he came to believe that “productivity could keep inflation in check.” By 1998, after Russia’s debt default and the collapse of the Long-Term Capital Management hedge fund, the Fed shifted to a cycle of rate cuts.

So, what is the significance of this token rate hike? With this move to safeguard the Fed’s credibility, Walsh has gained the flexibility to choose low-cost policy options. Going forward, if economic circumstances warrant, he still has room to raise rates further. But his target level may not be far from the end. With a bit of Greenspan-like luck, the current round of hikes may be over.