WisdomTree Investments Sep 17, 2026 4 min
With Kevin Flanagan, Head of Investment and Fixed Income Strategy at WisdomTree
Core PCE inflation is running at least a full percentage point above the Federal Reserve's target, on Kevin Flanagan's read of the producer and consumer price data that feeds it.
That is the number behind the quarter-point hike that took the Fed funds range to 3 3/4 to 4%. Flanagan's argument is that the decision was made for the chairman rather than by him: the bond market had already moved, and Kevin Warsh had left himself nowhere to stand.
"So, without this moderation, the bond market did all of the work and really put Warsh in the corner."
Flanagan runs investment and fixed income strategy at WisdomTree and records the Basis Points podcast, and he spends this episode on the gap between what Warsh had said and what the committee finally did. He does not think the rate hike story ends here.
The full episode is covered here so you can skip it.
Here are the 6 numbers that matter.
Key Takeaways
The FOMC raised by a quarter point to a 3 3/4 to 4% Fed funds range, which markets had already priced
Flanagan's inflation read: core PCE at least 3% year over year, a full point above a target Warsh called firm and fixed
The 2-year note sat 100 basis points over the old Fed funds target, and futures put over a 90% chance on a September move
The dot plot shows one more quarter point this year and none in 2027
The 10-year yield crossed 5% during the week, and he says one hike does not settle where longer yields end up
He frames the move as removing last year's cuts, not as the opening of a new tightening cycle
1. The Quarter-Point Move
Flanagan opened with the decision and the new range, and with the point that nothing about it was a surprise to the markets that set borrowing costs. He then said the sequence is unfinished.
"So, the Federal Open Market Committee decided to raise rates by a quarter point, brings the new Fed funds trading range to 3 and 3/4 to 4%." — Kevin Flanagan
"Now, that being said, the rate hike story doesn't end here." — Kevin Flanagan
"In fact, you can make the case this is not over by any means whatsoever and the bond market's going to continue to challenge the Fed to stay the course, of course, data permitting." — Kevin Flanagan
2. Warsh's Corner
The title of the episode is the argument: the chairman had sounded like an inflation hawk for months without acting like one. Flanagan traced the trap to two things Warsh did himself, his earlier language and his refusal to give markets any guidance about what comes next.
"Now, interestingly, Chairman Warsh had been, let's say it, talking the talk and giving off the impression he was an inflation hawk, but it wasn't until this Fed meeting that he finally did walk that walk." — Kevin Flanagan
"In fact, the chairman put himself into this position due to his prior rhetoric and perhaps most importantly his refusal to provide any forward guidance at all." — Kevin Flanagan
"And based upon his Jackson Hole comments, the hawkish tenor he set forth there really provided him with no wiggle room." — Kevin Flanagan
At Jackson Hole, Flanagan said, Warsh emphasized that the Fed would have work to do if inflation was not moving toward the 2% goal with speed, and said the inflation data to that point did not show a meaningful improvement in the trend.
3. No Moderation in Prices
The recent inflation reports did not give him an exit. Flanagan acknowledged the standard objection, which is that the Fed targets PCE rather than CPI, and then answered it with the inputs that build the PCE number before it is published at the end of the month.
"Well, based upon the most recent inflation reports, CPI in particular, there really wasn't any moderation in price pressures." — Kevin Flanagan
"But, based on inputs from the PPI, the CPI reports, it looks as if year-over-year core PCE is still going to be coming in at least 3%." — Kevin Flanagan
"A full percentage point above the Fed target, and Warsh reiterated that was a firm fixed target." — Kevin Flanagan
4. What the Market Said
Flanagan's case that the Fed was following rather than leading rests on three prices. The 2-year Treasury note, which tracks where policy is going, had moved a full percentage point above the old target. Futures had all but settled the September decision and were carrying a second move. The dot plot agreed with the first part and stopped there.
"The US Treasury 2-year note is 100 basis points over the let's call it old Fed funds target, and the implied probability for Fed funds futures, we're looking at over a 90% chance the Fed was going to go today at the September FOMC meeting, and pricing in an additional increase by year-end." — Kevin Flanagan
"In other words, two total rate hikes in Q4." — Kevin Flanagan
"And by the way, the dot plot, yep, there was a dot plot, and the expectation there was for another quarter point move for this year and none for 2027." — Kevin Flanagan
5. The 5% Ten-Year
Short-dated yields are the policy bet; the 10-year is the one that prices mortgages and corporate debt. Flanagan noted it had been through a level the market has argued about all year, and warned against reading the hike as the thing that decides its direction.
"I mean, the 10-year yield had been crossing the widely debated 5% threshold throughout this week, and we've highlighted in prior podcasts and blogs the driving forces behind this move." — Kevin Flanagan
"And make no mistake, one rate hike is not going to necessarily be the final arbiter of where longer-dated Treasury yields wind up." — Kevin Flanagan
6. Not a New Cycle
Flanagan closed on what the move is, which is narrower than the label a tightening cycle would put on it. His condition is growth holding up alongside inflation that will not come down.
"So, the bottom line message is an age-old motto. When you see a chance, take it." — Kevin Flanagan
"And if upcoming data continue to show good growth above target sticky inflation, we don't necessarily see this rate hike as the beginning of a new tightening cycle, but rather just removing some of the rate cuts that occurred during the September-December period of last year." — Kevin Flanagan
Bonus Insights
Flanagan built the whole episode on a distinction worth keeping: the Fed's target is PCE, the timely data is CPI and PPI, and the gap between them is where a chairman can buy time. His point is that the gap has closed, because the inputs already published make the end-of-month PCE reading predictable enough to act on.
He also left the forecast conditional rather than firm. Everything after the hike is tied to the data, and he said so twice, once as "data permitting" and once as a condition on growth and inflation both staying where they are.
Flanagan's bottom line is that the bond market forced this hike, that a second is priced for the fourth quarter, and that the Fed is unwinding last year's cuts rather than starting something new.
Products, Companies & Tools Mentioned
WisdomTree (Flanagan's firm; the Basis Points podcast is its fixed income commentary)
Federal Reserve (The quarter-point hike, Warsh's Jackson Hole remarks and the dot plot he read)
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