US Fed Decision: What to expect from Warsh's October meeting

The Federal Reserve is widely expected to keep interest rates unchanged on Wednesday. Investors and economists will closely examine its policy statement for clues about the next move and the central bank's assessment of persistent inflation pressures.

According to the Associated Press (AP), the Federal Open Market Committee's October 27-28 meeting comes amid rising consumer costs, elevated mortgage rates and renewed questions about the Federal Reserve's independence under Chairman Kevin Warsh, who was appointed by President Donald Trump earlier this year.

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The meeting also takes place less than a week before the US midterm elections, with affordability concerns remaining a key political issue as gasoline prices rise and grocery costs stay elevated.

Mortgage rates have added to the financial strain on households. The average rate on a 30-year mortgage climbed to a three-year high of 7.4% earlier this month before easing to 7.32% last week, compared with just under 6.2% a year ago. Oxford Economics estimates that this year's sharp increase has put homeownership out of reach for another 5 million households, AP reported.

Any further tightening by the Fed could increase borrowing costs and put additional pressure on prospective homebuyers.

Fed Rate Hike Unlikely Despite Persistent Inflation
Financial markets initially considered the possibility of a quarter-percentage-point rate increase after inflation data came in hotter than expected for the previous month. Such a move would have lifted the Fed's benchmark interest rate to approximately 4.1%.

However, several senior policymakers have played down the prospect of an October rate hike, and futures markets now indicate that investors see little chance of an increase from the current rate of around 3.9%.

The Fed typically raises borrowing costs to restrain spending and bring inflation under control. However, policymakers must also weigh the broader economic consequences of tighter financial conditions.

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Federal Reserve Vice Chair Philip Jefferson has pointed to the sharp rise in longer-term market interest rates, suggesting that policymakers need more time to assess financial conditions before deciding on their next move, AP reported.

Joseph LaVorgna, chief economist at SMBC Americas and a former senior Trump administration official, expects the central bank to avoid an increase immediately before the election, according to AP.

Although most economists consider a rate hike unlikely, persistent inflation could keep the possibility of tighter monetary policy on the table in the coming months.

Forward Guidance Under Scrutiny
The meeting will also test Warsh's approach to communicating monetary policy. The Fed chairman has expressed reservations about forward guidance, the practice of signalling the central bank's likely policy direction in advance.

Warsh has argued that such signals can commit policymakers to a particular course and limit their ability to respond flexibly to changing economic conditions.

However, recent remarks by senior Fed officials have given markets clues about the likely outcome of the October meeting, raising questions about whether the central bank is effectively continuing the practice under its new leadership.

Aditya Bhave, head of US economics research at Bank of America, has highlighted the uncertainty surrounding the approach, according to AP. If Warsh supports the recent messaging by other policymakers, it could raise questions about his opposition to forward guidance. If he does not, a surprise policy move could undermine the credibility of signals provided by other officials.

Nevertheless, economists broadly expect the Fed to leave rates unchanged on Wednesday.

Fed Independence Remains a Key Concern
Warsh's relationship with Trump is another issue investors will monitor closely.

At its September meeting, the Fed raised interest rates despite the president's preference for lower borrowing costs. The decision helped ease some concerns that Warsh might prioritise the White House's economic preferences over the central bank's inflation mandate.

James Knightley, chief international economist at ING, said the September decision had encouraged markets to view the Fed as continuing to exercise independent judgment, AP reported.

However, questions remain about the extent of communication between Warsh and Trump. The president has said he spoke to the chairman before the September meeting and indicated that Warsh could support a rate increase because other policymakers had publicly backed the move.

Trump has also criticised the rate-setting committee, describing it as politically motivated.

Separately, Trump has renewed efforts to remove Fed Governor Lisa Cook. The Supreme Court blocked an earlier attempt to remove her in June. A successful removal would create another vacancy on the central bank's board for the president to fill.

Warsh declined to discuss his communications with Trump at the September news conference, leaving uncertainty about the nature and extent of their interactions.

Derek Tang, an economist at Monetary Policy Analytics, said questions about the chairman's independence remain unresolved, according to AP.

Inflation Outlook Could Shape December Decision
Inflation is expected to remain central to the Fed's policy deliberations after price increases exceeded economists' expectations for two consecutive months.

Rising fuel costs have added to concerns that inflation could spread across the broader economy. Diesel prices reached a record $6.53 in late September and have since eased only modestly to $6.35.

Higher diesel prices increase transportation costs for businesses, affecting the movement of groceries, vehicles and other goods. Companies could pass those additional expenses on to consumers, extending inflationary pressures beyond the energy sector.

Inflation has also remained above the Fed's 2% annual target for an extended period. According to AP, Bhave noted that the target had not been achieved for an entire calendar quarter since the final three months of 2020.

Investors will therefore pay close attention to how Warsh characterises the inflation outlook and whether he reiterates the need to bring price growth back to the central bank's target more quickly.

Any indication that policymakers remain dissatisfied with the pace of disinflation could strengthen expectations of a rate increase at the Fed's December meeting.

Possible Dissent Could Signal Support for Higher Rates
The Fed's September rate decision was unanimous, but the October meeting could produce dissenting votes as policymakers debate whether the current interest rate is sufficiently restrictive.

Beth Hammack, president of the Federal Reserve Bank of Cleveland, and Lorie Logan, president of the Federal Reserve Bank of Dallas, are among the officials considered most likely to favour a rate increase, AP reported.

Both have expressed concerns that monetary policy may not be tight enough to slow economic activity and bring inflation under control.

According to AP, some economists believe that dissenting votes could ultimately benefit Warsh by demonstrating that support for higher interest rates remains within the rate-setting committee.

For investors, the number and direction of any dissents could offer additional insight into the balance of opinion within the Fed and the likelihood of further tightening.

With a rate hold widely anticipated, the central bank's inflation assessment, internal divisions and guidance on future policy are likely to determine how markets interpret Wednesday's decision.

(Disclaimer: This article is based on inputs from agencies. These do not represent the views of The Economic Times)