On September 16, 2026, the US Federal Reserve (Fed) raised its policy rate by 25 basis points, bringing it to the 3.75%–4.00% range. This marked the Fed’s first rate hike since 2023. Moreover, following the decision, a significant number of Fed members indicated they expected at least one more rate hike within the year. At first glance, this decision appears quite straightforward:
“The Fed raised rates → money became more expensive → conditions tightened for the markets.” However, this is where things get interesting. In some instances, a Fed rate hike can actually cause long-term market interest rates to fall by altering the market's future expectations. This brings us to one of the notable debates from the Kevin Warsh era.

First, it is necessary to distinguish between two concepts. The policy rate is the primary tool of the Fed’s monetary policy; through it, the Fed attempts to influence money and credit conditions in the economy. Market interest rates, on the other hand, are determined in the market by a multitude of factors, including investor expectations regarding the future, inflation, economic growth, risk perception, and the supply and demand for bonds. For instance, the yield on the US 10-year Treasury bond is not determined solely by the current Fed rate. Investors actually consider questions such as: “What will inflation look like over the next 10 years? Where will the Fed keep interest rates? How much will the US economy grow? What kind of return should I demand for purchasing this bond?” Consequently, a decision made by the Fed today and the market's expectations for the future do not necessarily move in the same direction.

So, how can a rate hike lead to lower market interest rates? Let’s consider the mechanism at play here with a simple example. Let’s assume the market believes inflation in the US will become entrenched. Investors might reason as follows: “Inflation will remain high → the Fed will be forced to maintain high interest rates for an extended period → interest rates will remain high in the future.” This expectation could drive up long-term bond yields. For instance:
Fed policy rate: 4%
10-year US Treasury yield: 5%
Now, if the Fed were to announce, “We are not seeing sufficiently rapid progress in the fight against inflation; we will raise rates further if necessary,” and the market believed the Fed was truly determined, something interesting might occur. The market might then begin to think: “The Fed will bring inflation under control. Therefore, interest rates might not need to remain as high as they are today a few years down the line.”
The result?
Fed policy rate ↑
(but) future interest rate expectations ↓
(and consequently) long-term bond yields ↓
This is what we might call a “paradoxical” policy dynamic.

The Fed’s 25-basis-point hike on September 16 makes this discussion even more significant. The Fed raised the policy rate to the 3.75%–4.00% range. While the decision was unanimous, 16 of the 18 members projected at least one more rate hike before the end of the year in the Fed’s economic forecasts. Moreover, Warsh highlighted the view that inflation was not moving toward the target quickly enough and noted that financial conditions were generally not tight enough. Consequently, for investors, the real question is not simply, “Did the Fed raise rates by 25 basis points?” The more important question is, “How did the market interpret this rate hike?” After all, asset prices are often determined less by the decision itself than by how much that decision deviates from expectations. Scenario 1: The Fed Raises Rates and the Market Tightens Further. This is a fairly classic scenario. The Fed raises rates by 25 basis points. The market concludes, "Inflation is more serious than expected." Consequently, one might observe:
Bond yields ↑
The dollar ↑
Pressure on stocks ↑
Appetite for risk assets ↓
In this case, the Fed’s rate hike effectively tightens financial conditions. Following the September 16 decision, the yield on the US 2-year Treasury note rose while the 10-year bond yield remained around the 5% level; stock markets also experienced a pullback after the decision.

Scenario 2: The Fed Raises Rates but the Market Takes a More Positive View of the Future. The second scenario is more intriguing. The Fed raises rates by 25 basis points, but the market thinks, "The Fed is serious about bringing inflation under control." In this instance, investors' expectations regarding future inflation and interest rates may decline. For example:
Fed rate: 4% → 4.25%
Yet, simultaneously, the 10-year bond yield might fall: 5% → 4.70%. At first glance, this appears contradictory—one might ask, "If the interest rate was raised, why did the yield fall?" The answer is simple: "Because one rate prices the present, while the other prices expectations for the future."

This is where "Warsh’s Paradox" comes into play. To summarize the paradox in a single sentence: By raising interest rates today, the Fed might try to convince the market that future interest rates could be lower. This does not mean that a rate hike directly lowers market interest rates; the actual mechanism operates through expectations. The Fed’s message might be: "I am acting more strictly today to bring inflation under control. If I bring inflation under control, I won't have to maintain such high interest rates in the future." Therefore, it is not enough for investors to look merely at the headline "interest rates have risen."

This is because what matters in the market is not just the current level of interest rates, but expectations regarding where rates will be in the future. For instance, an investor considering the purchase of US bonds does not look solely at the current Fed rate. They also monitor inflation data, employment figures, statements from Fed officials, 2-year and 10-year bond yields, the Fed’s future rate projections, the movement of the dollar, and economic growth forecasts. Consequently, making an automatic assumption like "the Fed raised rates, so all asset prices will fall" is incorrect.

This mechanism is also significant for the cryptocurrency market. Risk assets like Bitcoin can be affected by shifts in global liquidity and financial conditions. Rising interest rates can generally exert pressure on risk assets. However, if markets begin to anticipate that interest rates will fall and financial conditions will loosen in the future, risk appetite may strengthen once again. Therefore, for a crypto investor, it is more meaningful to ask, "How is the market pricing the situation following the Fed's rate hike?" rather than simply tracking the news that "the Fed raised rates." During the Warsh era, three indicators, in particular, can be closely monitored.
1. 2-year US Treasury yield
The 2-year Treasury yield is highly sensitive to market expectations regarding the Fed’s future policy rate. If this yield rises, the market may be anticipating a tighter monetary policy.

2. 10-year US Treasury yield
The 10-year yield is a key indicator for long-term inflation and growth expectations. A particularly interesting scenario here is:
2-year yield ↑
10-year yield ↓
This can be interpreted to mean that while the Fed will act more strictly in the short term, the market believes inflation will be brought under control in the long term.

3. The Dollar
The Fed pursuing a more hawkish policy can generally support the dollar. However, here too, one must look not just at the interest rate decision itself, but at how much that decision differs from market expectations.

The 25-basis-point rate hike on September 16 serves as a reminder of something important to investors: markets price in the future, not just the present. Therefore, a Fed rate hike does not automatically mean that all market interest rates will rise. If the rate hike conveys the message to the market that "the Fed will bring inflation under control," a higher policy rate today could contribute to expectations of lower interest rates in the future. This is precisely where "Warsh’s Paradox" comes into play: sometimes, the way to reassure the market is to act more strictly today, thereby reducing uncertainty about tomorrow. However, this outcome is not guaranteed. If the market interprets the rate hike as a sign that "inflation is getting worse," both the policy rate and market interest rates could rise in tandem. Thus, the most important question for the investor is: "Did the Fed raise rates?" ...should not be [that], but rather: “How is the market pricing the future following the Fed’s interest rate decision?”