Warsh Holds Rate Line as Inflation Data Fails to Shift Fed Stance

Federal Reserve chair Kevin Warsh signalled on Friday that recent hot inflation data has not altered the central bank’s assessment of the US economy, a stance that pushed the dollar lower and lifted stock futures on expectations that borrowing costs will stay unchanged at the Fed’s October policy meeting. Speaking at an IMF summit in Bangkok, Warsh declined to commit to any specific course of action for the rate-setting vote on October 28, saying he would not “prejudge” the outcome, but described economic conditions as “broadly” in line with what policymakers anticipated when they raised rates for the first time in three years last month.

The comments came after a September inflation reading raised investor bets that the Fed could deliver back-to-back rate rises. The headline consumer price index climbed 3.7 per cent year on year, driven partly by fuel price increases linked to the Iran war, while core prices, which exclude volatile food and energy components, rose to 2.6 per cent from 2.4 per cent in August. Following Warsh’s remarks, the probability of a rate hike at the October 28 meeting fell from roughly 27 per cent to about 15 per cent in fed funds futures, while the dollar slipped 0.1 per cent against a basket of major trading partners and S&P 500 futures gained 0.3 per cent.

The Fed raised its federal funds target range in September to 3.75 to 4 per cent, the first increase since July 2023, despite pressure from President Donald Trump to cut borrowing costs. Most economists argue that lower rates would risk overheating the US economy and reigniting price pressures. Warsh signalled he remains focused on inflation, noting that central bankers across the globe were “comparing notes” on the uncomfortable strength of price pressures. He also reiterated his commitment to reducing the Fed’s reliance on forward guidance, the practice of signalling future policy moves in advance, telling the audience: “We’re not in that business anymore.”

The September move was accompanied by Fed projections indicating only one additional rate rise before the end of the year, a step that several officials have suggested could wait until the central bank’s final meeting in December. Warsh’s refusal to tip his hand reflects a deliberate shift away from the communication style of his predecessor, who used public statements to manage market expectations for future rate paths. By declining to signal the timing of any further increase, the Fed chair is effectively forcing markets to price policy uncertainty themselves, a change that carries consequences for how investors position across currencies, equities, and rate-sensitive debt.

The central bank’s September increase came despite repeated pressure from President Donald Trump to cut borrowing costs, and most economists argue that lower rates would risk overheating the US economy and reigniting price pressures. Warsh indicated he remained focused on inflation, noting that central bankers across the world were comparing notes on the same “surge in prices.” His cautious tone was echoed by San Francisco Fed president Mary Daly, a non-voting member of the Federal Open Market Committee, who told Reuters on Wednesday that while further rate rises were “more likely than not,” the timing of any additional move was not “urgent.”

The episode underscores a deliberate shift in the Fed’s communication strategy under Warsh, who has sought to retire the practice of forward guidance. By refusing to signal the path of rates, the chair has effectively forced markets to price policy on incoming data alone, a stance that increases volatility around each economic release. The September inflation print demonstrated the risk of that approach: a single report briefly pushed the odds of an October hike above 50 per cent before officials walked the speculation back. The Fed signalled in September that only one additional rise was planned before year end, with several policymakers indicating that move could wait until December. President Donald Trump has pressed for lower borrowing costs, but most economists argue that cutting rates now would risk overheating an economy that is already running with uncomfortably strong price pressures.

Warsh’s refusal to offer forward guidance marks a deliberate break from the communication style of previous Fed chairs, who used explicit signals to manage market expectations. His position leaves investors to parse data releases and the remarks of individual officials for direction. San Francisco Fed president Mary Daly, a non-voting member of the Federal Open Market Committee, said on Wednesday that further rate rises were “more likely than not” but that the timing was not “urgent”, a formulation that captures the tension within the committee. The central bank’s September move, its first since July 2023, set the benchmark rate at a band of 3.75 to 4 per cent, and officials signalled only one additional increase before year-end, likely in December. President Donald Trump has pressed for cheaper credit, but most economists argue that lower rates would risk overheating an economy already contending with stubborn price pressures.

The episode illustrates the Fed’s deliberate retreat from forward guidance, a tool the central bank leaned on heavily in prior cycles. Warsh was explicit: “We’re not in that business anymore.” By refusing to signal the timing of future moves, the chair has shifted the burden of expectation-setting onto the data itself, which leaves markets to react sharply to each inflation print. The September release briefly pushed odds of an October hike to 55 per cent before Fed officials walked back that speculation. That volatility is the price of a more data-dependent policy regime, and it is likely to persist until the central bank’s December meeting, where most policymakers have indicated the next move, if any, can wait.

The immediate market response suggests investors read Warsh’s remarks as a signal that the Fed will hold steady this month. Yet the underlying tension remains unresolved. Inflation is running above target, the White House is pressing for cheaper credit, and most economists warn that aggressive rate cuts would risk overheating the economy and reigniting price pressures. Warsh acknowledged the shared concern among central bankers that inflation remains “uncomfortably strong,” even as he resisted committing to a timeline. For markets, the takeaway is that the Fed under Warsh has deliberately abandoned the habit of signalling its next move in advance. That leaves investors to price every data release on its own merits, which is likely to keep rate expectations volatile through the final months of the year.