- The Federal Reserve is expected to keep interest rates unchanged on Wednesday, even though September inflation data came in hotter than expected. Investors on Tuesday saw less than a 10% chance of a quarter-point move this week but priced in a hike at the December meeting, the last of the year.
- The data backdrop is uncomfortable for a pause. Consumer prices rose in September at their fastest pace in five months, a gauge of underlying inflation rose more than expected, and producer prices climbed at their fastest pace in more than four years.
- Several key officials spent the run-up pushing back on an October move. Vice Chair Philip Jefferson and New York Fed President John Williams said roughly a month ago that the Fed has time to assess the economy, and Governor Christopher Waller said officials don’t need to tighten at consecutive meetings.
- Chair Kevin Warsh will have to explain why policymakers are not acting now after voting unanimously last month to raise rates. Wolfe Research’s Stephanie Roth expects Warsh and other officials to “subtly signal” that they remain intent on raising rates further.
What Happened?
The Fed releases its post-meeting statement at 2 p.m. Wednesday in Washington, and Warsh holds a press conference 30 minutes later. Projections released last month showed officials supported one additional hike this year, a forecast Warsh is likely to be asked about. “The Fed is overwhelmingly likely to skip the October meeting, in line with market expectations,” Roth said, adding that officials are “increasingly concerned about inflation.” Warsh has avoided giving hints, saying at the IMF meetings in Bangkok this month, “It’s a new chapter at the Fed, and we’re not in that business anymore.”
Why It Matters?
A hold paired with hawkish language would keep pressure on rate-sensitive assets, because markets are already leaning toward a December hike and any confirmation could push short-term yields higher. The risk of dissent adds another layer: three regional presidents dissented in July in favor of a quarter-point hike and could do so again. Cleveland Fed President Beth Hammack has warned that repeated supply shocks could entrench an inflationary mindset, Minneapolis Fed President Neel Kashkari has said it is the Fed’s job to tame inflation after five years of supply shocks, and Dallas Fed President Lorie Logan said more hikes are needed while noting that rising Treasury yields may also help slow the economy.
What’s Next?
Investors will parse the statement for any change in the description of inflation and count the dissents, then turn to the press conference for clues on December. Warsh has set up a task force of outside experts whose mandate includes reviewing the press conference schedule and other parts of the Fed’s communications, so the format itself could keep changing. September’s press conference was notably shorter than usual, and a similarly brief session today would leave markets to read more into the statement and any dissents.
Affected Tickers and Coins: SPY, TLT, SHY
Source: Bloomberg
