Federal Reserve policymakers are likely to keep key interest rates unchanged at the conclusion of a seemingly uneventful meeting on Wednesday (October 28). However, investors and economists will not let their guard down, scrutinizing the central bank's statement for clues about the Fed's next move and the direction of inflation. This meeting, held on October 27-28, is the fourth under Chairman Kevin Warsh's tenure. Warsh, appointed by President Donald Trump earlier this year, has been overshadowed by questions about the Fed's independence. Meanwhile, the meeting is taking place just six days before the midterm elections, a time when soaring gasoline and food prices have raised concerns about affordability, a key focus of the elections . High mortgage rates are also a heavy burden on consumers; the average 30-year mortgage rate hit a three-year high of 7.4% earlier this month, before falling back to 7.32% last week, and just below 6.2% a year ago. Oxford Economics estimates that the sharp rise in interest rates this year has already made it impossible for an additional 5 million households to afford homes. Further rate hikes by the Fed could push mortgage rates even higher. Amidst these intertwined changing factors, five key details from this meeting warrant attention.

Meeting Tone: Political and Economic Pressures Behind a Flat Agenda

On the surface, the most likely outcome of this meeting is to maintain interest rates unchanged, but the political and economic environment in which it takes place is far from calm. With only six days until the midterm elections, the affordability issues stemming from gasoline and food prices continue to escalate, and mortgage rates remain relatively high. These factors make every word from the Federal Reserve more susceptible to scrutiny and interpretation. Warsh's tenure has been marked by controversy surrounding his independence, and with the meeting so close to the election, the market is not only concerned with the interest rate decision itself but also with whether the statement reveals new assessments of inflation, employment, and the future policy path. Policymakers need to strike a balance between their responsibility to combat inflation and avoiding excessive tightening of the economy, while investors hope to glean from the statement whether the Federal Reserve is simply observing or preparing for its next move.

Rate hike probability: Holding rates steady has become a near consensus.

Following last month's higher-than-expected inflation data, Wall Street investors and some economists anticipated a 25-basis-point rate hike by the Federal Reserve at its Wednesday meeting, bringing the rate to approximately 4.1%. The Fed, tasked with combating inflation, typically raises borrowing costs to cool spending and suppress inflation. However, several senior officials on the interest rate-setting committee have downplayed the possibility of an October rate hike in recent speeches. Based on interest rate futures prices, investors now almost universally believe the Fed will not raise the current rate of approximately 3.9%. Fed Vice Chairman Philip Jefferson noted that long-term interest rates in financial markets have risen significantly and stated that he and his colleagues need to form their own judgment, which may require more time. Joseph Lavolnia, chief economist for the Americas at Sumitomo Mitsui Banking Corporation and a former senior Trump administration official, stated that central banks would remain on hold until the election because the Fed does not want to "poke the White House in the eye" six days before the election. These statements collectively reinforced market expectations that the Fed would maintain the current interest rate at this meeting.

Forward-looking guidance: The tension between Walsh's insistence and officials' statements

The statements by Jefferson and others have raised questions about one of Warsh's signature moves: his aversion to so-called "forward guidance." Forward guidance refers to the practice of a former chairman explicitly signaling the central bank's next move. Warsh has stated that such guidance locks the Fed into a specific path, limiting its flexibility in responding to economic data. However, speeches by several senior officials this month, in the view of some economists, resemble forward guidance, only not spoken by the chairman himself. Adiya Buff, head of U.S. economic research at Bank of America, believes there are two possibilities: either Warsh tacitly endorsed and supported this information, in which case the credibility of his claim of disliking forward guidance must be questioned; or he does not support it. In the latter case, Warsh might implement a surprise rate hike, thereby ending forward guidance by showing the market that they can no longer rely on it. However, most economists still believe the likelihood of a rate hike is quite low.

Independent review: Questions remain after the September rate hike

At the Federal Reserve's last meeting in September, Warsh defied Trump's preferences and raised interest rates, a move that somewhat alleviated concerns that the new chair would become what Massachusetts Senator Elizabeth Warren called the president's "puppet." Trump had stated before selecting Warsh in January that he would only choose a Fed chair willing to cut rates. James Knightley, chief international economist at ING Bank, said the September rate hike, against the White House's wishes, largely eased these concerns, and the market was encouraged by what it saw. However, since the September meeting, Trump has intensified his efforts to remove Fed Governor Lisa Cook, which, if successful, would free up another seat for him on the Fed Board, after the Supreme Court blocked his previous attempt to remove her in June. Trump also stated after last month's Fed meeting that he had called Warsh beforehand and told him to "might as well" vote for a rate hike because other members of the interest rate-setting committee had publicly called for it, calling the committee "hostile" and "politicized." Warsh declined to comment on any communication with Trump at last month's press conference, despite reports that he frequently speaks with the president. Derek Tang, an economist at Monetary Policy Analysis, said that questions remain about the chairman's independence because the scope of Walsh's communication with Trump is still unclear.

Inflation Qualitative Analysis: Diffusion Pressures from Diesel Prices and Transportation Costs

Inflation has exceeded most economists' expectations for two consecutive months, exacerbating concerns that soaring gasoline prices could push up overall economic costs. Diesel prices hit a record high of $6.53 per gallon at the end of September, before only falling back to $6.35. High diesel costs will drive up transportation prices for almost all goods, including food and automobiles, and businesses may pass these costs on to consumers, spreading inflation to more sectors of the economy. Buff pointed out that for nearly six years since the last three months of 2020, inflation has never reached the Fed's 2% annual rate target in any calendar quarter. If Warsh reiterates some of his previous statements that inflation is too high and the Fed intends to bring it back to 2% in a "more timely" manner, economists and investors will interpret such remarks as a signal that the Fed is likely to raise interest rates at its next meeting in December. Therefore, Warsh's characterization of inflation not only affects the market's interpretation of this meeting but also relates to policy expectations in December.

Dissent signals: A dissenting vote might actually be a "bonus point".

The Federal Reserve's September rate hike decision was unanimously approved; however, many Fed watchers expect two or three dissenting votes from the 12 voting officials. Cleveland Fed President Beth Hammark and Dallas Fed President Lori Logan are considered the most likely to vote in favor of the rate hike this week. Both have stated that the Fed's key interest rate is not yet high enough to slow the economy and cool inflation. Ironically, some economists believe that dissenting votes could actually benefit Warsh and the Fed, as it indicates that there are still voices within the committee supporting higher rates. This internal disagreement could be interpreted by the market as a policy divergence, or it could be seen as evidence that the Fed is still seriously assessing inflation risks. Overall, the probability of keeping the key interest rate unchanged at this meeting is high, but the market is not really focused on the outcome itself, but rather on the wording of the statement, Warsh's characterization of inflation, subtle changes in forward guidance, clues related to independence, and the number of dissenting votes. These details will collectively influence investors' judgment on whether a rate hike will occur at the December meeting, and will also affect the market's understanding of how the Fed is balancing electoral pressures and inflationary pressures.

Frequently Asked Questions

Q: What is the most likely outcome of this Fed meeting? A: The most likely outcome is maintaining the current key interest rate of approximately 3.9%. Futures prices indicate that investors almost universally believe there will be no rate hike this time, and several senior officials have downplayed the possibility of an October rate hike. However, the wording of the statement could still influence market expectations for the December meeting. Q: Since a rate hike is highly unlikely, why pay attention to the meeting statement? A: Because the statement may reveal the Fed's assessment of inflation, long-term interest rates, and the economic outlook. Investors will look for clues about the next steps, especially whether Warsh continues to emphasize that inflation is too high and whether it signals a possible rate hike in December. Q: Why is Warsh's independence still questionable? A: Warsh was appointed by Trump, who has stated that he will only choose a chairman willing to cut interest rates. Although the September rate hike alleviated concerns to some extent, Trump has intensified his efforts to remove Cook, and the scope of Warsh's communication with Trump is unclear. Therefore, the market remains focused on the chairman's independence. Q: Why is diesel price a key indicator of inflation? A: Diesel costs will drive up transportation prices for almost all goods, including food and automobiles. Businesses may pass these costs on to consumers, causing inflation to spread to more sectors of the economy. Diesel prices hit a record high of $6.53 per gallon at the end of September, and have only slightly declined since then, thus being seen as a significant signal of spreading inflationary pressures. Q: What does the appearance of dissenting votes mean for Warsh? A: Some observers expect two or three dissenting votes this week. This could indicate that there are still voices within the committee supporting higher interest rates, or it could be interpreted as a policy disagreement. Some economists believe that dissenting votes actually help Warsh and the Fed show that they are still seriously assessing the risks of inflation.