When the history of monetary policy is written for 2026, the most fitting adage for Federal Reserve chairman Kevin Warsh might be the famous Charles Dickens line that begins A Tale of Two Cities: “It was the best of times and the worst of times.”

It might be considered the worst of times because tightening monetary policy won’t be popular with President Donald Trump or the Republican Party that already faces an uphill battle to hold on to its narrow majorities in the House and Senate come November.

The Democrats have their own tale to exploit: a misguided and poorly executed war with Iran has led to a big spike in energy prices, exacerbating the affordability crisis along with higher mortgage rates. If Trump was unhappy with former Fed chair Jerome Powell even after he implemented three rate cuts in 2025, how is the president going feel about his chosen successor, Kevin Warsh, raising rates ahead of the midterm elections after less than four months in the job?

But it could also be viewed as the best of times because the rationale for tightening policy has rarely been so clear cut. Inflation continues to exceed the Fed’s 2 per cent objective while the labour market is stable at very low unemployment rate.

The Fed is only missing on one side of its dual mandate, and the risks are skewed towards even higher rates of inflation in the short term. Last week’s report showing the Consumer Price Index rose 0.3 per cent in August excluding food and energy, which clinched the deal in the market’s mind, could even be viewed as a stroke of luck by making the choice less difficult.

Also, a tightening move will bolster Warsh’s credibility by demonstrating a commitment to restraining inflation as well as his independence from Trump. A rate hike would confirm Warsh’s hawkish speech at last month’s Jackson Hole central bank conference — indicating his commitment to a 2 per cent inflation objective and Fed independence, with action.

This would demolish the argument that Warsh is “all hat, no cattle”, which would be a fair critique if he were to stand pat at this week’s Federal Open Market Committee meeting. To be sure, with the market putting the probability of a 25-basis-point tightening at about 90 per cent, Warsh really has no choice.

With a tightening nearly a foregone conclusion, the focus will turn to the medium-term outlook. Is this going to be “one and done” or the first in a series of tightening moves? In my view, with the caveat that it certainly depends on how the economic outlook evolves, the likelihood is that we will see a series of rate hikes.

First, and most importantly, there is little evidence that monetary policy is currently restrictive. We’ve been at this level of short-term rates or higher for almost four years, yet the economy continues to grow at a rate sufficient to keep the unemployment rate at or below the level that Fed officials judge consistent with maximum sustainable employment and stable inflation.

Second, the historical record is fully consistent with a series of tightening steps. One-off moves are very rare. The last one happened in 1997, when the Fed tapped the brakes early that year and then subsequently eased in the autumn of 1998 when the Asian currency crisis emerged. The probability that any tightening move (the first or a subsequent one in a series) will be followed by another has been about 85 per cent to 90 per cent over the past several decades.

There are good reasons for this. A 25-basis-point hike is too small to have a meaningful impact on economic activity. Also, given the long lags of monetary policy, it takes time for monetary policy moves to have an observable impact. Thus, the Fed tends to keep going in the same direction until it has done a meaningful amount (eg, 75 basis points or more) and has had time to observe a significant change in the economic outlook.

I would expect Fed officials to pencil in a median of two 25-basis-point hikes (including this week’s move) in the September Summary of Economic Projections, or SEP, for 2026. If the Fed were to fully unwind last year’s easing with three quarter-point hikes, that would just push the federal funds rate target up to the lower end of the range indicated by most of the Fed’s Taylor Rule type of formulations.

For 2027, Fed policymakers might expect to go up another step in early 2027 then down later in the year as inflation subsides. However, since the SEP just shows the federal funds rate projection at the end of the calendar year, such an up-down pattern would not be discernible.

Looking farther out into 2028, the SEP will likely show further moderation in inflation and rate cuts. But this does not have much signal value. It really is just a built-in feature of the SEP in recent years — inflation always returning to 2 per cent, and, as inflation comes down, the Fed following, moving monetary policy back to a neutral setting,

It will also be noteworthy how Warsh responds to questions at his press conference following the FOMC decision. His first two press conferences did not go well because Warsh was not only unwilling to provide forward guidance about how interest rates were likely to be adjusted in the future but also was mum about how he was evaluating the economy or about his monetary policy reaction function.

Explaining why the Fed has hiked rates will be straightforward, but the public will also want to know what is likely to influence the Fed’s decisions going forward.

Has Warsh learnt his lesson — exhibited in his Jackson Hole speech — that it behooves him to be more forthcoming? Or is he going to continue to try to outsource monetary policy to financial markets?

That would be a poor strategy because the markets price to what they expect the Fed will do, not what it should do.

And, of course, it is the Fed, not markets that is responsible for monetary policy.

• Bill Dudley is a Bloomberg Opinion columnist and a former president of the Federal Reserve Bank of New York