Traders are betting overwhelmingly that the Federal Reserve will hold interest rates steady when it meets later this month, but those assumptions may be dangerously outdated.
Futures markets assigned just a 15% probability to an October rate hike as of Friday morning, reflecting widespread confidence that the Fed will pause its tightening campaign.
That confidence rests heavily on remarks from senior Fed officials, including Vice Chairman Philip Jefferson and New York Fed President John Williams, who both signaled little urgency to raise rates further.
Markets interpreted those remarks as a green light to price in a hold, quickly repricing in favor of a pause when Jefferson and Williams spoke in recent weeks.
But Fed Chair Kevin Warsh has repeatedly rejected the convention of telegraphing policy decisions before the Federal Open Market Committee meets, raising serious questions about whether traditional market assumptions still apply.
Warsh addressed the International Monetary Fund in Bangkok on Friday, saying outright that he was not signaling a decision one way or the other, while markets still leaned heavily toward a hold.
Jefferson, Williams, and Warsh form what is known informally as the troika, a top-level decision-making team, but Warsh’s break from conventional forward guidance clouds how much weight their public remarks should carry.
Warsh also went out of his way at the September press conference to distance himself from the Fed’s Summary of Economic Projections, telling a reporter bluntly, “Those aren’t my forecasts.”
The inflation data could give Warsh enough cover to push the FOMC toward a hike on Oct. 28, with the consumer price index rising 3.7% annually through September and the producer price index gaining 6.3%.
The new data implies that the next reading of the Fed’s preferred inflation gauge, core personal consumption expenditures, will come in at 3.1% year over year, well above the Fed’s stated target.
Warsh left no ambiguity about his inflation tolerance at his closely watched Jackson Hole speech in August, declaring: “There should be no misunderstanding,” and affirming that the Fed’s 2% PCE goal “is a firm, fixed target.”
That hawkish framing at Jackson Hole directly preceded a unanimous FOMC decision to raise interest rates in September, demonstrating Warsh’s ability to move the committee when he chooses to apply pressure.
Warsh’s Jackson Hole speech described an economy growing strongly, with inflation posing a greater concern than the labor market, and leaned heavily on what he characterized as loose credit conditions.
The Chicago Fed’s National Financial Conditions Index has risen about 0.05 points since Jackson Hole but remains negative, indicating conditions have tightened modestly but remain loose overall.
In Bangkok, Warsh said of the economy since September, “The world has broadly conformed to our expectations,” a remark markets took as broadly consistent with holding rates, though its meaning is far from certain.
Raising rates while markets strongly expect otherwise would likely trigger significant volatility, a factor that has historically prompted Fed officials to coordinate their messaging more carefully.
A surprise hike after Jefferson and Williams appeared to guide markets toward a hold could damage their credibility and make future Fed decisions even harder to anticipate for investors.
Warsh could enter the October meeting ready to push wavering committee members toward a hike, citing booming AI-driven demand and warm inflation readings, or he could defer to the broader committee’s views.
The chairman is visibly still establishing how he operates at the top of one of the world’s most powerful institutions, and his next move is genuinely difficult to predict with confidence.
Investors who dismiss the possibility of an October surprise based on past Fed behavior may be underestimating how profoundly Warsh has already changed the rules of engagement.
