Fed officials’ remarks lower October rate-hike expectations as Warsh stays silent
In short
Remarks by two senior Federal Reserve officials have pushed down market expectations for a US rate increase in October, while Chair Kevin Warsh has kept quiet on the future path of policy. New York Fed President John Williams said on September 29 that one more increase this year may be appropriate but that there is no need to rush, and Vice Chair Philip Jefferson said on October 1 that any adjustment needs careful review of the data. Yonhap reported that markets had priced about a 70% chance of an October increase before Williams spoke.
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Expectations for a US interest-rate increase in October have receded after senior Federal Reserve officials spoke about the policy path while Chair Kevin Warsh kept quiet, according to Yonhap and Korea Economic Daily. Yonhap said the remarks of the officials have effectively worked as policy signals. Korea Economic Daily said in its headline that October rate-hike expectations had pulled back. [ 1 , 2 ]
New York Fed President John Williams said on September 29 that raising the policy rate once more by the end of the year may be appropriate, but that there is no need to hurry, Yonhap reported. Fed Vice Chair Philip Jefferson said on October 1 that a policy adjustment should come only after careful review of data trends and the outlook, and that the decision may take more time. [ 1 ]
Before Williams spoke, the market priced roughly a 70% chance of an increase in October, according to Yonhap. After the two sets of remarks, and with weaker-than-expected inflation data, those expectations fell quickly, the report said. [ 1 ]
Market economists read the two speeches as an attempt to guide expectations. Goldman Sachs economists concluded that an October increase would be difficult, Yonhap reported, citing Bloomberg. Evercore ISI chief economist Krishna Guha called the remarks “authoritative”, and JPMorgan chief economist Michael Feroli said both speeches carried the message that rates need not be raised at every meeting and that the intervals between increases can now be adjusted somewhat, according to Yonhap. [ 1 ]
Yonhap reported that there is no evidence that Jefferson and Williams coordinated their speeches with each other or with Warsh. Ellen Meade, an economics professor at Duke University, said there is a subtle but clear difference between forward guidance that treats a rate change as settled and guidance that slows the pace pending sufficient data, Yonhap reported. The report added that the episode shows markets will try to read policy direction even while the chair withholds signals. [ 1 ]
Why it matters
The coverage shows individual Fed officials’ remarks doing the work of policy signals while the chair withholds guidance, and market economists treating them as deliberate expectation management. The shift matters to investors because it changes pricing for the Fed’s next decision, which is read well beyond the United States; Korea Economic Daily flagged the retreat in October rate-hike expectations as its main point.
Key facts
- Federal Reserve Chair Kevin Warsh has refrained from giving signals on the future path of interest rates. [ 1 , 2 ]
- New York Fed President John Williams said on September 29 that raising the policy rate once more by the end of the year may be appropriate, but that there is no need to hurry. [ 1 ]
- Fed Vice Chair Philip Jefferson said on October 1 that a policy adjustment requires careful review of data trends and the outlook, and that the decision may take more time. [ 1 ]
- Market-implied odds of an October rate increase stood at about 70% before Williams spoke and fell quickly afterwards, helped by weaker-than-expected inflation data. [ 1 ]
- Goldman Sachs economists concluded that an October rate increase would be difficult, Yonhap reported, citing Bloomberg. [ 1 ]
- JPMorgan chief economist Michael Feroli said both speeches were an attempt to manage market expectations and carried the message that rates need not rise at every meeting. [ 1 ]
- There is no evidence that Jefferson and Williams coordinated their speeches with each other or with Warsh. [ 1 ]
- Korea Economic Daily reported that expectations for an October rate increase had retreated. [ 2 ]
Confirmed by several sources
- Federal Reserve Chair Kevin Warsh has not offered signals on the future path of interest rates. [ 1 , 2 ]
- Market expectations for a US rate increase in October receded after remarks by senior Fed officials. [ 1 , 2 ]
- New York Fed President John Williams said on September 29 that one more rate increase this year may be appropriate while there is no need to rush. [ 1 ]
- Fed Vice Chair Philip Jefferson said on October 1 that the timing of a policy adjustment requires careful review of data trends and the outlook, and may take longer. [ 1 ]
Still unclear
- Whether the two speeches amount to traditional forward guidance. Yonhap reports differing interpretations: Duke University economics professor Ellen Meade said there is a subtle but clear difference between guidance that treats a rate change as settled and guidance that slows the pace pending sufficient data, while economists at several firms read the remarks as expectation management.
- Whether Williams, Jefferson and Warsh coordinated their messaging. Yonhap states there is no evidence that Jefferson and Williams coordinated their speeches with each other or with Warsh, and no document reports any coordination.
- How far October rate-hike expectations have fallen. The documents give only the roughly 70% probability priced before Williams spoke, and say expectations retreated quickly afterwards without providing an updated figure.
- Whether the Fed will actually leave rates unchanged in October. This rests on economists’ assessments, including Goldman Sachs’s view that a hike would be difficult, rather than on any decision by the Fed.