Warsh downplays forward guidance on interest rates; speeches by two senior Fed officials still move the market; October rate hike expectations cool sharply.

Warsh downplays forward guidance on interest rates; speeches by two senior Fed officials still move the market; October rate hike expectations cool sharply. Although Fed Chair Warsh has made clear he does not want to send the market an explicit signal on the rate path through forward guidance, speeches this week by two senior Fed officials still significantly influenced investor expectations. Fed Vice Chair Jefferson and New York Fed President Williams said in succession that the Fed has time to further assess the economic situation and need not rush to raise rates again, prompting the market to sharply cut its bets on an October hike. According to federal funds futures pricing, before Williams spoke on Tuesday, traders saw about a 70% probability that the Fed would raise rates at its October 27-28 meeting. By the time Jefferson finished speaking on Thursday, that probability had fallen to about 25%. Inflation data released in between came in weaker than expected, further weakening market expectations for a near-term rate hike. Still, Fed officials have not ruled out the possibility of further monetary tightening. Inflation remains above the policy target, and U.S. Consumer Price Index (CPI) data scheduled for release on October 14 could become an important basis for determining the direction of subsequent policy. Two senior Fed officials speak in succession; market quickly cuts October rate hike bets At its September 16 policy meeting, the Fed voted unanimously to raise rates by 25 basis points, the central bank's first increase in the policy rate since 2023. At the time, overall U.S. economic growth was showing signs of accelerating, while inflation remained persistently high, prompting policymakers to resume tightening measures. In the economic projections released afterward, Fed officials signaled that another rate hike was possible this year. That policy backdrop drove the market to quickly bet on another increase in October, and Treasury yields also climbed sharply, further pushing up borrowing costs in the U.S. economy. However, speeches by Williams and Jefferson this week, just two days apart, changed the market's judgment on the timing of a rate hike. Both emphasized that the Fed can wait for more economic data before deciding whether further rate increases are needed. Because the New York Fed president not only has a permanent vote on the Federal Open Market Committee (FOMC) but also traditionally serves as its vice chair, Williams's policy remarks have always drawn intense market attention. Traditionally, the Fed chair, vice chair and New York Fed president are regarded as the core trio in monetary policy decision-making. During the tenures of some former chairs, investors generally believed that public remarks by the vice chair or the New York Fed president could reflect the shared stance of this core decision-making group. However, there is currently no evidence that Jefferson and Williams coordinated their remarks in advance, nor is there evidence that their speeches were arranged uniformly by Warsh. Even so, several Wall Street institutions still believe the two officials' remarks conveyed a relatively consistent policy message. Goldman Sachs economists said the speeches by Jefferson and Williams further reinforced their view that the Fed is unlikely to raise rates in October. Krishna Guha, head of economic research at Evercore ISI, and colleagues said in a report on Thursday that the message jointly conveyed by the two officials carries considerable weight. Michael Feroli, chief U.S. economist at JPMorgan, argued that the two speeches were intended to adjust market expectations. He noted that the core message from the two officials is that the Fed does not have to raise rates at every consecutive meeting, but can appropriately lengthen the interval between policy adjustments in order to assess economic data and the impact of previous rate hikes. Warsh downplays forward guidance as Fed shifts toward greater reliance on economic data It is worth noting that the senior Fed officials' clear impact on market expectations this time comes as Warsh tries to change the central bank's way of communicating with investors. Unlike the past practice of guiding market rate expectations through forward guidance, Warsh prefers to avoid hinting in advance at the direction of future policy adjustments. He does not participate in the Fed's quarterly rate projections and tries to avoid revealing the next rate move in public speeches, instead encouraging investors to judge the policy outlook on their own based on economic data. This communication approach has won support from some economists. Critics of forward guidance argue that during special periods such as financial crises, explicit policy commitments help stabilize market expectations; but in an environment where economic data change rapidly and policymakers find it difficult to accurately judge future trends, over-reliance on forward guidance may limit policy flexibility. The economic data released this week reflected this complexity. On the one hand, both inflation and employment data came in weaker than expected, reducing the urgency for the Fed to raise rates again immediately; on the other hand, U.S. consumer spending has remained resilient, and economic growth has also shown signs of accelerating. This means the Fed needs both to guard against persistently high inflation and to watch for possible weakness in the labor market. Ellen Meade, an economics professor at Duke University who long served as an adviser to the Fed Board of Governors, believes the speeches by Jefferson and Williams may not amount to forward guidance in the traditional sense. She noted that there is a subtle but important difference between committing in advance to a certain rate adjustment and saying that more time is needed to collect data and make a prudent decision. William English, a professor at Yale University's School of Management and a former Fed division director, likewise believes the two officials' speeches may not have been coordinated, but were more likely separate expressions of their own judgments on the economic situation and monetary policy. Multiple officials stress patience, but divisions on rate hikes remain internally In addition to Jefferson and Williams, remarks by other Fed officials this week also showed that the decision-making layer currently prefers to wait for economic data to provide further guidance. At a conference held in Asheville, North Carolina, Richmond Fed President Barkin, Boston Fed President Collins and Kansas City Fed President Schmid all declined to clearly disclose their policy judgments for the year's final two policy meetings. When asked about the future rate path, all three stressed the need to watch upcoming data. Barkin said the economy should first be observed to see how it develops. Subsequently, Fed Governor Bowman, who oversees bank supervision, also said there is no urgent need to adjust rates again at present. However, not all Fed officials share the same view on further rate hikes. Dallas Fed President Logan, who has actively advocated higher rates this year, said this week that multiple rate increases may still be needed to eventually bring inflation back to the Fed's 2% target. But she also noted that the term premium in the bond market is rising, which could also exert some restraint on the economy. Wall Street reassesses rate path; October 14 inflation data becomes key After the successive speeches by Fed officials this week, the market's judgment on the monetary policy path for the remainder of the year changed markedly. Eric Wallerstein, chief macro strategist at Clocktower Group and a former adviser to former Fed Governor Miran, believes the speeches by Jefferson and Williams were intended to correct market expectations for the pace of near-term rate hikes. He said that when market pricing diverges from the economic and policy reality as officials understand it, it is not new for the Fed to influence investor expectations through public communication. Still, the wait-and-see signal from officials does not mean this rate hike cycle is over. On the one hand, the Fed's September policy projections still show that policymakers expect another rate hike may be needed this year; on the other hand, the recent significant rise in U.S. Treasury yields also requires officials to assess the impact of tighter financial conditions on the economy. At the same time, the Consumer Price Index due for release on October 14 will provide the Fed with new clues on inflation. If price pressures remain persistently high, further rate hikes may still remain a policy option; if inflation continues to cool, policymakers may gain more room to observe changes in the economy. It is worth noting that the U.S. September employment report released on Friday showed that nonfarm payrolls increased by only 29,000, further strengthening market expectations that the Fed will pause rate hikes. According to market pricing published that day, the probability of an October rate hike had fallen further to about 14%, below the roughly 25% level when Thursday's speeches ended. Overall, the core signal from senior Fed officials this week is not the end of rate hikes, but that there is no need to act hastily at two consecutive meetings. Although Warsh is downplaying traditional forward guidance, the speeches by Jefferson and Williams show that Fed officials' policy remarks can still significantly influence market expectations. With employment data weakening and inflation pressures not yet fully subsiding, the timing of the Fed's next rate adjustment will still depend on the growth and inflation situation reflected in economic data over the coming weeks.