Warsh Stays Silent as Fed Officials' Cautious Signals Cut Odds of an October Rate Hike

Expectations for an October interest-rate increase have retreated quickly as softer-than-expected inflation data compounded remarks from senior Federal Reserve officials that suggested a slower pace of tightening.

With Fed Chair Kevin Warsh refraining from signaling the future path of rates, comments from other top central bank officials are effectively serving as policy signals for markets.

John Williams, president of the Federal Reserve Bank of New York, said on Sept. 29 that one more rate increase by the end of this year could be appropriate, while stressing there was no need to rush. Two days later, on Oct. 1, Fed Vice Chair Philip Jefferson said policymakers may need more time before reaching a decision as they carefully assess data trends and the outlook when adjusting policy.

The remarks were interpreted as signaling a slower pace of rate increases. The probability of an October hike had been about 70% before Williams spoke, but fell quickly after weaker-than-expected inflation data reinforced the shift.

The attention paid to the two officials' remarks also reflects Warsh's communication style. He has avoided forward guidance and stuck to a stance of making decisions based on economic data. With limited policy signaling from the chair, markets have turned to comments from other senior officials for clues on the policy path.

The New York Fed president holds a permanent vote on the Federal Open Market Committee and, by convention, also serves as the committee's vice chair. Alongside the Fed chair and vice chair, the role is often viewed as part of a monetary-policy "troika." In the past, remarks from the Fed vice chair or the New York Fed president have often been read as signaling the broader view of that trio.

Market participants viewed the speeches as a clear attempt to recalibrate expectations, and said the Fed appears to be taking a more cautious approach to upcoming policy decisions.

Bloomberg reported on Oct. 2 that Goldman Sachs economists, taking the two officials' remarks together, had firmed up their view that an October rate increase would be difficult. Krishna Guha, Evercore ISI's vice chairman, called the remarks an "authoritative" message.

Michael Feroli, chief U.S. economist at JPMorgan Chase, likewise viewed the speeches as an effort to manage market expectations.

"Both speeches carried the message that there is no need to keep raising rates at every meeting, and that policymakers can now adjust the interval between hikes somewhat," he said.

Still, views differ on whether the remarks qualify as a typical form of forward guidance. Ellen Meade, a Duke University economics professor, said there is a subtle but clear distinction between guidance that treats a rate move as a foregone conclusion and guidance that slows the pace while saying officials will decide only after reviewing sufficient data.

There is no evidence that Williams and Jefferson coordinated their speeches with each other or with Warsh in advance. Even so, the episode again showed that markets will try to infer the policy direction one way or another, even when the Fed chair avoids commenting on the rate path.

Shin Yong-hyun, Hankyung.com reporter, yonghyun@hankyung.com