On Wednesday, October 28th, the Federal Reserve will announce its interest rate decision early Thursday morning. The market has priced in a near 90% probability that the federal funds target rate will remain in the 3.75% to 4% range. This expectation is based on the backdrop of a 3.7% year-on-year increase in the US Consumer Price Index (CPI) in September, with the core CPI rising to 2.6% year-on-year. The energy component, particularly gasoline prices, saw a 9.1% increase in September, contributing significantly to the rise, while employment data showed only 29,000 new jobs added. Since assuming the chairmanship on May 22nd, Warsh has made limited public appearances, and his communication preferences differ from those of other committee members. Jefferson and Williams' previous statements that further data assessment before a decision could be made have been interpreted by the market as one of the signals supporting maintaining the current rate.

The Fed's interest rate decision pricing and recent data context

The current interest rate range was raised by 25 basis points in September, the first increase since 2023. Market pricing indicates a significantly higher probability of maintaining the current rate at this meeting than of raising it, thus shifting the focus to the statements and press conference following the decision. The rise in the September Consumer Price Index (CPI) was primarily driven by energy prices, with relatively limited increases in the core component, although housing and some service prices remained resilient. The coexistence of slowing job growth and price data creates a framework of "growth and price pressures" in parallel. Warsh previously stated publicly that he would not predict the meeting's outcome, a statement consistent with the principle of data dependence; however, in the absence of forward guidance, the weight of specific statements from other committee members has increased accordingly. The August Personal Consumption Expenditures (PCE) CPI was approximately 3.4% year-on-year, with the core CPI at approximately 3%. September data will be released the following day, and the market will need to assess whether the energy shock continues to transmit to broader components both before and after the decision.

Observation phase of Walsh's communication style

Renaissance Macroeconomics economist Neil Dutta points out that observers are still in the information-gathering stage regarding Warsh's communication style. Since taking office, Warsh has held a limited number of press conferences and has been relatively restrained in public, emphasizing data interpretation over prior guidance. This approach contrasts with the Fed's decades-long practice of guiding market expectations through forward guidance. If interest rates are kept unchanged this time, Warsh needs to explain the specific reasons for maintaining the current level to avoid the market interpreting his statements as "more talk than action" as it has been after previous meetings. Dutta believes Warsh needs to provide convincing reasons for choosing to wait when price data is strong. The statements of the so-called "three-person group" within the committee are therefore receiving extra attention: Jefferson and Williams stated that they could further observe the data before deciding on the next step, which some market participants see as indirect support for maintaining the current level. If the decision unexpectedly raises the rate, it could be interpreted as Warsh's personal style dominating the committee's decision-making.

The cost transmission path of AI-related investments to prices

Goldman Sachs economists point out that AI-related investments are pushing up price pressures in developed economies through three pathways. First, rising computing memory hardware costs have the most direct impact on the US. Second, the transmission of memory price increases to consumer electronics such as mobile phones and computers. Third, increased electricity demand from data centers is putting pressure on electricity prices. Overall, estimates suggest this will raise core inflation by an average of about 25 basis points year-on-year in developed economies excluding the US, and could peak at 60 basis points for the US personal consumption expenditure core price index. This impact is expected to peak around the first quarter of 2027, and then gradually subside as memory price pressures ease. Warsh previously mentioned the demand-driven nature of AI investment, with supply-side benefits following later, providing an additional dimension to explain current price pressures. However, policy responses still need to differentiate between short-term cost shocks and medium- to long-term productivity changes.

Committee Signals and Paths Observation

In the absence of new economic forecasts and a dot plot, the wording of the statement and the chairman's press conference became the primary sources of information. If interest rates remain unchanged, Jefferson and Williams' previous statements about "further assessment" may carry more weight, and the market will observe whether Warsh will adopt a similar framework of "waiting for new information before deciding whether policy adjustments are appropriate." Warsh mentioned at the Jackson Hole conference that most colleagues considered waiting for new information more prudent and reiterated the statement of "being prepared to act as circumstances dictate," a framework that may provide a reference for this statement. It is worth noting that reducing forward guidance means that the transmission of short-term yield curve data to long-term rates may weaken, and the market's direct reaction to data will be given greater weight. Recent strong inflation data from Australia, accompanied by hawkish comments, has increased expectations for a rate hike at the next meeting; in the UK, attention is focused on changes in the retail environment. These external signals provide a comparison for observing the relative pace of tightening in a global context.

Frequently Asked Questions

Question 1: Why did the market still price in a probability of the Fed keeping interest rates unchanged at around 90% even after the stronger-than-expected September price data? Answer: Market pricing mainly reflects the statements made by other committee members regarding the availability of further data to observe, and Warsh's emphasis on not predicting the meeting's outcome. Energy prices contributed the majority of the increase, while the core components saw relatively limited gains, and slowing job growth led some observers to believe there was room to wait for more data. Question 2: What are the main differences between Warsh's communication style and past Fed practices, and how should the market respond? Answer: Warsh tends to reduce forward guidance, emphasizing data reliance and not predicting the meeting's outcome. This increases the weight of specific statements from other committee members, requiring the market to rely more on actual data interpretation rather than prior signals, and the transmission of short-term interest rates to long-term interest rates may be correspondingly weakened.