The Federal Open Market Committee began its two-day meeting on Tuesday, October 27. The Fed is expected to keep interest rates unchanged on Wednesday, October 28. Michael Feroli said, “Chair Warsh will have to explain why the committee hiked after a two-tenths core PCE print in September but is now holding.”
Synopsis
Federal Open Market Committee meeting today: Fed is expected to keep interest rates unchanged despite persistent inflation, putting Kevin Warsh under pressure to explain the decision. With markets expecting another rate hike in December, his remarks could offer clues about the central bank’s next move and how it plans to bring inflation back to its 2% target.
Fed is expected to leave interest rates unchanged on Wednesday but persistent inflation could make the decision difficult to explain. Fed Chair Kevin Warsh faces pressure to justify a pause after policymakers raised rates in September especially as investors anticipate another increase before the end of the year.
Federal Open Market Committee (FOMC) began its two day meeting on Tuesday, October 27. Its interest rate decision is scheduled for Wednesday, October 28 at 2 pm ET. Which will be followed by Warsh’s press conference at 2:30 pm ET.
Markets are pricing in less than a 10% chance of another quarter-percentage-point increase, according to CME Group’s FedWatch tool. A pause would leave the benchmark federal funds rate in a range of 3.75% to 4%.
The question now is whether Warsh will signal that the Fed is prepared to raise rates again in December, even if it decides to wait at this meeting.
Why the Fed May Hold Rates Despite Rising Inflation
The expected pause comes as inflation remains above the Fed’s 2% target. The central bank raised rates by a quarter percentage point in September after its preferred inflation measure, the personal consumption expenditures (PCE) price index, recorded a 0.2% increase in core prices for August.
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September’s inflation figures have added to the challenge. Core PCE inflation is expected to rise 0.3% for the month, according to JPMorgan Chase chief U.S. economist Michael Feroli.
Feroli said in a note, “Chair Warsh will have to explain why the committee hiked after a two-tenths core PCE print in September but is now holding after an expected three-tenths outturn," as quoted by CNBC.
The timing also puts the Fed’s decision under scrutiny less than a week before the November 3 US midterm elections. Although officials maintain that political considerations do not influence monetary policy, Feroli warned that an unexplained pause could fuel speculation about the factors behind the decision.
A ‘Hawkish Pause’ Could Keep December in Focus
Former Fed Vice Chair Alan Blinder expects a “hawkish pause,” meaning the Fed could leave rates unchanged while signaling that further increases remain possible.
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Blinder told Yahoo Finance that the central bank could make clear it stands ready to raise rates again, potentially pointing toward December as the next opportunity to act.
Traders are already anticipating another increase at the Fed’s December meeting. Minutes from September’s gathering showed that most participants considered another hike likely to be appropriate by the end of the year, although officials did not specify when it should happen.
Goldman Sachs economists also expect the Fed to raise rates at alternate meetings. However, they do not anticipate major new signals from Warsh’s press conference. Goldman economist David Mericle said in a note, “We do not expect significant new information from the press conference,” adding, “The seemingly strong support for hiking every other meeting means there is likely a high bar to deviate from that plan through the end of the year, which should limit the impact of Fed communication for now,” quoted CNBC.
Three Fed Officials Could Oppose a Pause
The decision may not be unanimous. Cleveland Fed President Beth Hammack, Dallas Fed President Lorie Logan and Minneapolis Fed President Neel Kashkari are potential dissenters, having voted against holding rates steady in July.
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Their possible opposition highlights the disagreement over how quickly the central bank should respond to persistent inflation.
Former Fed Governor Stephen Miran also sees a change in the way policymakers are approaching interest rates. Miran told on CNBC’s Squawk Box that, “There’s a completely new reaction function in town,”
Miran, now a senior strategist at Hudson Bay Capital, argued that the Fed’s current approach is leading officials to forecast additional rate increases. Market participants, meanwhile, remain focused on whether the central bank will follow through with another hike in December.
Kevin Warsh Must Explain the Fed’s Next Move
Warsh faces a difficult balancing act. A pause despite elevated inflation could raise questions about the Fed’s resolve, while a stronger signal about future rate increases could unsettle investors.
Deutsche Bank chief US economist Matt Luzzetti told Yahoo Finance that he expects Warsh would signal that recent inflation data reinforces the need for further rate hikes over time. He said, "Warsh will want to avoid any indications that the Fed is unwilling to take appropriate action against sticky inflation."
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