Crib Notes For Warsh & Co. On The Fed's Dual Mandate

During the final four months of 2025, the Fed lowered the federal funds rate (FFR) three times by a total of 75bps. The cuts were justified for two reasons: Inflation was approaching the Fed's 2.0% target, and the labor market was weakening. So the FFR was deemed to be too restrictive, i.e., above the "neutral" FFR. Under the Fed's dual mandate, the risk that unemployment would rise was increasing, while the risk that inflation would rise was falling.

Neither of these conditions holds today. Inflation has moved higher. Hiring has picked up, and the unemployment rate has remained low. Arguably, the current FFR is no longer restrictive, as the neutral rate has been boosted by robust AI-related capital spending and a drop in the personal saving rate as Baby Boomers retire.