Fed reaction function
Updated
What it is
A central bank's reaction function describes the systematic way it is expected to adjust policy, such as its interest-rate target, in response to incoming economic data like inflation and employment. For the Federal Reserve, this means investors and economists try to infer what level of above-target inflation or labor-market weakness would need to be seen before the Fed cuts, holds, or hikes rates. Fed officials, including Chair Kevin Warsh, have spoken publicly about the data thresholds that would trigger policy moves, and markets use those statements to price the expected path of rates.
Why it matters lately
At Jackson Hole in August 2026, Warsh said the Fed needed confidence that underlying inflation was moving toward its 2% target clearly and at sufficient speed before acting, a statement markets read as a description of the Fed's reaction function. That speech pushed market-implied odds of a September hike from roughly one-third to nearly two-thirds, and the Fed went on to raise its target range a quarter point to 3.75%-4.00% on September 16, 2026, with its own projections not seeing core PCE inflation back at 2% until 2029.
Asymmetric Analytics view
Inference (AA): AA tracks the Fed's reaction function as the primary transmission channel from inflation data releases to its US rates and macro playbooks.