US Fed stands still as focus turns to future rate path

The economist view

As expected, the US Federal Reserve (Fed) kept rates on hold at this week’s meeting, keeping the Fed Funds target range at 3.75-4%, though with two dissents in favour of a hike (Hammack and Cook). Warsh gave the impression of this being a fairly hotly contested decision, saying they have just had a “heck of a family fight.”

Why no hike?

They want more information: The main message on why they have remained on hold was largely that they want more data before deciding. From the statement: “The accumulation of more information will help the Committee determine the policy decision”). Warsh said the next inter-meeting period would be information rich. Warsh was adamant that politics played no role (despite the mid-terms next week).

A December hike still seems a sensible central case

Warsh didn’t give much away on the outlook for policy, but there wasn’t anything in his comments (or the statement) likely to change the general view that a December hike is on the way unless the tone of the data takes a significant turn for the worse or becomes disinflationary. They see inflation as too high, economic growth as strong, and the labour market as stable; Warsh again reiterated their commitment to hitting the inflation target. 

For more clues on the near-term policy outlook, it is Fed speakers other than Warsh that we would look towards, after the usual meeting restrictions around public commentary end.”

Warsh described financial conditions as having tightened since the last rate hike at the previous meeting, but again said he was unwilling and unable to call them tight, further leaving the door open for more tightening.

Watch other speakers, rather than Warsh

As we saw ahead of this meeting, for more clues on the near-term policy outlook, it is Fed speakers other than Warsh that we would look towards, after the usual meeting restrictions around public commentary end. Warsh implied too that he played no role in coordinating messaging after the last Fed meeting.

Bullish on the economy but that doesn’t need to mean lots of hikes

What we did get from the statement and Warsh was a relatively bullish take (again) on the economy (the description in the statement on the pace of economic activity growth changed from “solid” to “strong”). While AI is clearly playing a role, Warsh pointed out that capex growth is broadening out beyond just tech.

In 2028, they plan to repurpose two meetings. Eventually then they anticipate six monetary policy decisions a year, down from the current eight. The meetings will be repurposed to discuss broad monetary policy strategy.”

However, he also made the points that: 1) it is not their judgement that the economy is running too hot; 2) even with the tech sector, interest rate increases are impactful and “get through the cracks” and he can already see them having an impact on the sector (implying to us that even if they see growth as tech led, that doesn’t mean they would see the need for lots more hikes than if it was driven by another economy); 3) it not being their goal to throw people out of jobs, but to make the economy more durable and achieve stable prices.

Dropping a decision next year

The other bit of news we got in the decision was that they will be dropping a monetary policy decision next year (repurposing one of the meetings). In 2028, they plan to repurpose two meetings. Eventually then they anticipate six monetary policy decisions a year, down from the current eight. The meetings will be repurposed to discuss broad monetary policy strategy. Presumably, these strategy meetings will draw on the findings of the taskforces. At the press conference, Warsh said that some, though not all, would report their findings before the end of the year.

The fund manager view

Market expectations for the Fed’s October meeting were low. Having raised interest rates for the first time in over three years at its September meeting, in the eyes of the market, consecutive hikes were relatively remote possibility, with a less than 10% chance of a hike being priced. The Fed did not disappoint, and market focus was squarely on the messaging regarding the future path of monetary policy. In particular, does December still look likely to deliver the second hike in this cycle, with markets pricing around an 85% probability going into the meeting?

By re-asserting the commitment to deliver price stability, 'no ifs, ands or buts', the signal was that Fed would be prepared to hike again, should the data warrant it.”

Despite it only being his third meeting as Fed Chair, something of a pattern is beginning to emerge in Kevin Warsh’s communication style. He started by outlining the current strength of the US economy, domestic consumer spending and a healthy jobs market – effectively putting a tick against the “full employment” side of the Fed’s dual mandate. This perhaps sets the scene for justifying a future tightening of policy to tackle the other side of the mandate – price stability - with inflation being above target for “close to six years”.

Warsh also re-affirmed his personal stance of not being a fan of forward guidance (absent a crisis, such as that seen in “the darkest days of the 2008 crisis”) and chose to paint a picture of an “information rich interval in the coming period", ahead of the next Fed meeting in six weeks’ time. He noted that financial conditions had tightened following the September meeting, with some of the effects now starting to come through but could still not be described as “tight”. However, by re-asserting the commitment to deliver price stability, “no ifs, ands or buts”, the signal was that Fed would be prepared to hike again, should the data warrant it.

Further clarity around the Fed’s thinking may come to light over the coming days as the Governors emerge from their communication blackout period and Warsh’s reports of a “heck of a family fight” could see some clearer signalling on December.”

So where is the market left? Further hikes are still priced, but slightly less than was the case prior to meeting (closer to 2.5 hikes than the 3 hikes going into the meeting). Whilst it would be a stretch to describe the messaging from the Fed’s October meeting as ‘dovish’ it was perhaps more balanced than some possibly hawkish signals given over recent weeks. Further clarity around the Fed’s thinking may come to light over the coming days as the Governors emerge from their communication blackout period and Warsh’s reports of a “heck of a family fight” could see some clearer signalling on December.

In the intervening period between now and the next Fed meeting in December, we have the US mid-term elections and a raft of economic data, all amidst the ongoing conflict in the Middle East. Whilst the market is starting to look through the short-term moves in energy prices, with the link between the oil price and bond yields decoupling over recent weeks (oil prices remain elevated whilst bond yields have fallen), global sovereign bond market volatility remains elevated and the final two months of 2026 are unlikely to see this change.

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