Fed Leaves Funds Rate Unchanged, With Warsh Citing More Data Ahead

If you’ve been tracking the CME FedWatch Tool like we have, much like us, you weren’t surprised that the Federal Reserve left the federal funds rate intact between 375 and 400 basis points following the conclusion of Wednesday’s policy meeting. The policy statement was once again rather brief one, but when it came to inflation this is what it said:

Inflation remains elevated. The accumulation of more information will help the Committee determine the policy stance appropriate to ensure a timely return of inflation to the Committee’s 2 percent goal. The Committee will deliver price stability.

That set the stage for Federal Reserve Chair Walsh’s press conference during which he reiterated the above and explained that the Fed did not react to political influence or the distance to the mid-term elections. Rather, he cited a data rich environment that once observed will help the FOMC better determine where policy should be. Warsh also said that in six weeks, the Fed will be in a better position to determine the right stance of policy.

You probably heard my eyes roll as you read that, and to his credit, Warsh did a so-so job in deflecting questions about why, given the data we have received so far, the Fed opted not to lift interest rates. 

One question during the Q&A session touched on something we were musing during the press conference: How does the Fed hope to restore credibility as inflation data continues to move in the wrong direction relative to its 2% target for the PCE price index?

Gaming it out, either the Fed is expecting to see softer inflation data prints in the coming weeks, which arguably has a low probability, or, as we’ve started to contemplate, perhaps a larger rate hike could be on the table? 

What makes it a wee bit more complicated is Warsh’s “no forward guidance” comments, and the fact that even when he shares what he observes when looking out the window, it begs the question about how the Fed can or will regain its credibility.

For us, I’ll stick to following the data and the next piece to look at will be the September PCE Price Index data out later this week. And while we will parse that data, given the array of September inflation data already received, I’d argue the October PMI Price data from S&P Global and ISM next week will be far more revealing. In addition to that data, we’ve shared planned price increases from a growing set of companies set for next year, and odds are we’ll hear more of the same as we move through the balance of the current earnings season. That tells us the Fed will have its work cut out for it.

It also means that given the prospect for higher interest rates in the coming quarters, we will most likely continue to avoid interest rate sensitive sectors, focusing instead on areas where capital is being deployed. 

Finally, Fed Chair Warsh did break some new ground during Wednesday’s presser. He shared that, in 2027, of the eight Fed meetings, seven will be on policy with corresponding statements, down from eight this year. In 2028, the number of policy meetings will dip again to six. Those non-policy meetings as we’ll call them will be more big picture conversations among FOMC members according to Warsh with no policy statement to follow. 

This sounds to us a bit like Warsh moving toward his goal of the Fed communicating less, something he laid out during his early days as chair. Does the Fed need time to gather and take a high-level view on things? How could it not, but why remove policy meetings from the calendar? 

Instead, do what many companies do and hold a strategic off sight or strategy meeting. 

Don’t get me started…