Federal Reserve Chair Kevin Warsh stayed mum Friday on the path for interest rates, even after hot inflation data this week – which traders took as a sign officials will hold rates steady this month.
Speaking at an economic conference in Bangkok, an event viewed as his last chance to prepare investors for a possible rate hike, Warsh instead declined to share forward guidance, saying, “It’s a new chapter at the Fed, and we’re not in that business anymore.”
Many interpreted his comments – or lack thereof – as a sign that he’s expecting to delay a second rate hike to December. The odds of a hold at the Fed’s Oct. 28 meeting jumped above 85% Friday, up from about 72% the day before, according to CME FedWatch.
“I don’t prejudge meetings. I don’t believe in saying now what I might do at the meetings that we have in the balance of this year,” added Warsh, who has repeatedly railed against forward guidance and argued markets should interpret economic data on their own.
However, the Fed chief also acknowledged “synchronous tightening in monetary policy” by central banks around the world, which means “there’s no free riders” – something he described as a “positive development.”
The Dow Jones Industrial Average rose 122 points, or 0.2%, by about 11:45 a.m. ET, while the S&P 500 and Nasdaq tumbled 0.3% and 1.1%, respectively. Long-term US Treasury yields showed little movement after Warsh’s comments, remaining stubbornly above 5%.
In the days leading up to Warsh’s fireside chat, several of his colleagues at the Fed said they would be comfortable waiting to raise interest rates.
Michelle Bowman, the Fed’s vice chair of supervision, said Wednesday at the Bangkok summit that inflation remains above the central bank’s 2% goal – but there’s “time to wait and see” before taking “more action.”
But inflation data this week came in much hotter than anticipated, which many investors feared could push the Fed to act quicker and hike rates this month – just a week before the closely-watched midterm elections.
On Wednesday, data showed the Consumer Price Index rose 3.7% in September on an annual basis, largely due to higher energy prices amid the war with Iran.
The Producer Price Index, released Thursday, jumped a whopping 6.3% – threatening to keep prices on clothes, food, toys and gasoline higher through the holiday season, experts warned.
Dennis Follmer, chief investment officer at Montis Financial, said the stronger-than-expected reports are a sign that inflation is extending beyond oil and gas prices, all but guaranteeing a second rate hike this year.
“While we should expect some dissents, we think Chairman Warsh and the FOMC will tiptoe past the elections without a further rate hike, but with what is looking to be a very strong Q3 GDP report, a hike at the December meeting seems almost a foregone conclusion,” he wrote in a note Friday.
Among other factors, economists have warned that the rapid buildout of data centers – backed by multibillion-dollar investments – could be driving inflation higher. US government debt has also been mounting, recently surpassing $40 trillion.
Warsh remained enthusiastic about AI, saying it will ultimately be a positive supply shock that economies use to become more productive and wealthier – though the path to get there may be “very bumpy” with an uncertain near-term impact on jobs.
“On the path to that positive supply shock, we’re seeing increases in aggregate demand. That just is what it is,” he said. “I want you to hear from me optimism, but optimism leavened by the seriousness of purpose.”
In a decade, people will look back on the new tech and “say this was hugely consequential,” he added.
Warsh also remained optimistic about the broader economy, saying, “Almost everywhere in the global economy is showing resilience that I’m not sure I would’ve predicted five or six months ago.”
