Investors want Fed Chairman Kevin Warsh to explain how the central bank will approach further rate increases, economists say. His quieter communication style has left the market guessing about where tightening ends.
Economists say the Fed's decision on interest rates matters less on Wednesday than whether Warsh can show he can communicate the central bank's strategy. Analysts want to know if the hot September inflation readings were a game-changing development, and what criteria the Fed will use to judge the timing and pace of later hikes.
Analysts will watch Warsh's press conference for signs of a strategy to curb prices after more than five years of inflation above the Fed's 2% target.
The market prices a shallow tightening
Juhi Dhawan, global macroanalyst at Wellington Management, said the market cares about the final destination more than the outcome of Wednesday's meeting. The market now expects a shallow tightening of up to three rate hikes by the end of the first quarter of 2027, she said.
That fits the narrative that the Fed is reversing the three cuts it made last year over concern about the labor market. However, Dhawan said a more aggressive approach remains possible: a full hiking cycle would be 150 or 200 basis points, which would take rates back to the highest levels since 2023.
Warsh offers no guidance on where hikes end
Derek Tang, co-founder of forecasting firm LH Meyer, said the market has a very difficult time understanding when the hikes will end. Previous Fed chairs gave a forecast, such as saying the Fed can hike until underlying inflation gets low enough and then hold rates steady. Warsh has not provided any signals about the Fed's approach.
According to Tang: "He’s become quite skilled at giving non-answers."
Silence at the September meeting moved yields
Warsh took office in May and introduced a sea change in Fed communication, arguing that a quieter Fed would let the market speak louder. Nicholas Economides, a professor of economics at NYU's Stern School of Business, said the approach has proven to be a mistake.
At his September press conference, Warsh declined to say whether the first hike in three years would be a one-off or the start of a series. Without guidance, markets pushed the 10-year Treasury yield up to 5.3% as they priced in a rate hike in October.
Source: MarketWatch
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