On Monday, October 26, the Federal Reserve's target range for the federal funds rate remained at 3.75% to 4%, the current level after a 25 basis point increase at the September policy meeting. With the policy meeting approaching this week on October 27-28, market pricing indicates a dominant probability of maintaining the current interest rate, but there is still room for further adjustments in December. The US Consumer Price Index (CPI) rose 3.7% year-on-year in September, and 0.6% month-on-month; the core CPI was 2.6% year-on-year. The Producer Price Index (PPI) for final demand rose 6.3% year-on-year and 1.3% month-on-month. Regarding the US job market, non-farm payrolls increased by only 29,000 in September, and the unemployment rate rose to 4.2%. Crude oil prices remained high, with West Texas Intermediate (WTI) crude futures fluctuating around $101 per barrel and Brent crude near $115 per barrel, indicating that the transmission effect of energy prices to downstream industries has not yet fully subsided. Meanwhile, strong demand for electricity, electronic components, and raw materials from the construction of artificial intelligence-related infrastructure provides additional support for the prices of some consumer goods. Long-term US Treasury yields recently climbed above 5%.

The current landscape of policy path and market pricing

Following the September rate hike, Federal Reserve officials publicly signaled that they could wait for more data. The president of the New York Fed and the vice chairman of the Board of Governors both stated that there was still time to observe subsequent data while assessing the next steps. This statement prompted the market to quickly lower the probability of a rate hike at the October meeting from over 70% to below 30%. Current overnight index swap pricing indicates a probability of keeping rates unchanged this week at approximately 70% to 80%, while expectations for another rate hike at the December meeting are relatively concentrated. At the press conference following the September meeting, Warsh emphasized that the action was aimed at returning to the 2% inflation target more quickly, noting that summer data did not show a significant improvement in the underlying trend. In the summary of economic projections, most officials expect another adjustment this year, which is largely in line with current market pricing for December. The slowdown in US job growth provides some buffer for the observation window, but the lack of a corresponding improvement in inflation indicators means that the judgment of the policy pace still depends on the completeness of the subsequent data series.

Energy and AI Transmission Mechanisms of Inflationary Pressures

The main contributor to the rebound in US inflation in September came from the energy sector. Gasoline prices rose 9.1% month-over-month and 34.2% year-over-year, accounting for more than half of the overall month-over-month increase. The widening price gap between crude oil and refined products further amplified the transmission to transportation, chemicals, and food processing. The energy component of the Producer Price Index rose more than 10% month-over-month, and the significant fluctuations in final demand prices indicate that upstream pressure is still spreading to the midstream and downstream sectors. Strong demand for electricity, semiconductor components, and basic materials driven by investments in artificial intelligence (AI) pushed up prices for consumer electronics, personal computers, and electricity. During the IMF annual meeting in Bangkok, Warsh pointed out that AI investment primarily affects the demand side, and the supply-side response takes longer, which puts additional pressure on prices in the short term. He also stated that most central banks globally are adopting a synchronized tightening stance, meaning there are no free riders. These combined factors, while preventing core inflation from spiraling out of control, have resulted in a slower pace of decline than previously expected, forcing the policy committee to weigh the length of its observation period.

The Chairman's communication style and market expectations have been repeatedly adjusted.

After taking office, Warsh explicitly reduced forward guidance on the future path. He believed that providing specific paths during routine fine-tuning phases could easily be interpreted by the market as commitments, thus limiting policy flexibility; strong commitment tools were only suitable during crises. After keeping interest rates unchanged at the July meeting, the press conference was relatively brief, raising market doubts about the willingness to address inflation, leading to volatility. In his August public speech, Warsh emphasized his focus on inflation, and the September meeting put this into action, updating economic forecasts. In a dialogue in Bangkok on October 16, he again refused to predict the meeting's outcome, stating, "I don't predict the meeting, and I don't think it's time to explain the possible actions for the remainder of the year," and noting that the economy was generally performing as expected in September. Warsh himself insisted on a data-driven approach, causing the market to repeatedly reprice data releases and officials' speeches, with volatility primarily stemming from the pace of communication rather than individual data points.

The supplementary role of long-term interest rates in financial conditions

The yield on 10-year U.S. Treasury bonds briefly exceeded 5.2% in early October before falling back to around 4.97%. Higher long-term interest rates directly increase financing costs for housing, automobiles, and credit cards, thus constraining aggregate demand. Warsh previously stated that rising long-term yields help achieve policy objectives. The rise in long-term interest rates partially substitutes for further increases in short-term policy rates, keeping financial conditions tight even with the federal funds rate unchanged.