US Economic Weekly Kevin Warsh and the parable of the Chinese farmer

US Economic Weekly Kevin Warsh and the parable of the Chinese farmer

Hikes are not a policy mistake. But will 75bp be enough? 18 September 2026

Fed hikes looked politically challenging a few months ago, but they increasingly seem Economics like an opportunity for Chair Warsh to burnish his legacy. We stick to our call for two United States more, in Oct and Dec. The robustness of the nominal economy both increases the risks US Economics of inflation persistence and reduces the risks that hikes will cause a recession. However, BofAS if supply shocks prove persistent, the Fed might eventually have to choose between an Aditya Bhave extended inflation overshoot and a hard landing. US Economist BofAS The week ahead: Looking for color on the Fed path

Next week is relatively light on the data front. We get the S&P Global manufacturing & Stephen Juneau US Economist services PMIs (Wed), current account balance (Thu), new home sales (Thu), durable goods BofAS orders (Fri) and UMich consumer sentiment (Fri). However, there is a full slate of Fed- speak next week, including Goolsbee (Mon), Williams (Tue, Thu, Fri), Barkin (Tue, Thu), Shruti Mishra Hammack (Thu, Fri) and Paulson (Thu). We'll be watching for clues on the policy path, US Economist BofAS particularly from Williams, whom we suspect had a “one-and-done” dot in the SEP. Fed review: Hike first, ask questions later See Team Page for List of Analysts As expected, the Fed hiked by 25bp at the Sep meeting, with a strongly hawkish message. The statement dropped language linking inflation to supply shocks (I.e., no Glossary more excuses), while the SEP showed stronger growth, higher inflation and a lower u- CPI: Consumer Price Index rate despite two hikes this year. Chair Warsh reinforced the message, making it clear that the job is not done. (see: US Watch: Sep FOMC review). PMI: Purchasing Managers’ Index

PPI: Producer Price Index Data review: Retail sales support booming nominal growth Aug retail sales surprised strongly to the upside, with ex-autos and control group sales NFP: Nonfarm payrolls both up 1.4% m/m. The strength was led by nonstore retailers, reflecting normalization BEA: Bureau of Economic Activity after the shift in Prime Day from Jul to Jun. But the Aug gains were broad based, including a 1.2% rise in food services. Combined with positive revisions, the report led ECB: European Central Bank us to raise our 3Q PCE tracking estimate from 2.6% q/q saar to 3.4%. Bottom line: the nominal economy is booming, giving a monetarist like Warsh little reason to stop hiking. PCE: Personal Consumption Expenditures

FOMC: Federal Open Markt Committee

SEP: Summary of Economic Projections

JOLTS: Job Openings and Labor Turnover Survey

BofA Securities does and seeks to do business with issuers covered in its research BLS: Bureau of Labor Statistics reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. Refer to important disclosures on page 15 to 16.

Kevin Warsh and the parable of the Chinese farmer Aditya Bhave US Economist BofAS

• Fed hikes looked politically challenging a few months ago, but they increasingly seem like an opportunity for Chair Warsh to burnish his legacy. We stick to our call for two more, in Oct and Dec.

• The robustness of the nominal economy both increases the risks of inflation persistence and reduces the risks that hikes will cause a recession.

• However, if supply shocks prove persistent, the Fed might eventually have to choose between an extended inflation overshoot and a hard landing.

Fluctuating fortunes The Parable of the Chinese farmer is the story of a farmer who faces a series of circumstances that seem either unlucky or fortuitous at first blush. Other villagers alternate between offering their commiserations and congratulating him. But he responds the same way each time: “We’ll see”.

Why is this relevant? Kevin Warsh was nominated for Fed Chair in January despite being a rank underdog in the race just a few months prior. A stroke of good fortune, perhaps?

Before his nomination…