Inflation readings keep coming in hotter than expected, yet the Fed appears almost certain to stand pat this week. That contradiction is funneling all the pressure onto tonight's press conference — how will Warsh explain to markets the decision to pause while inflation is clearly straying from target, without damaging the Fed's policy credibility?
According to the latest Reuters survey, 94 of 100 economists expect the Fed to hold rates at 3.75%-4.00% tonight, CME fed funds futures imply only about a 10% chance of a hike this meeting, and Goldman Sachs' equity volatility desk puts the swap-implied probability even lower at 7%.
Yet the inflation data hardly support that stance: September core CPI rose 0.3% month-on-month, above the 0.2% consensus, with the annual rate climbing to 2.6%; the three-month annualized pace of core CPI jumped from 2.0% to 3.4%. After the September CPI release, the odds of an October hike briefly rose to about 50% — that violent swing itself reflects deep market uncertainty over the Fed's path.
Bank of America Securities is the most prominent dissenter on Wall Street right now, with its economist team maintaining a October hike call on the view that the inflation data provide sufficient justification. BofA rates strategist Mark Cabana warned in a note that if Warsh chooses to pause without offering a clear explanation, there is a risk of repeating the "dovish misstep" of the July press conference, which could put significant pressure on the dollar and the Treasury curve. For investors, the real suspense tonight is not the decision itself but every word Warsh utters.
Consensus forms: a tacit "hike every other meeting" rhythm
The core logic driving pause expectations comes from dense signals Fed officials have sent between meetings. According to Goldman Sachs chief U.S. economist David Mericle's FOMC preview, FOMC members' remarks point to a consensus: proceed with tightening at a pace of "hiking every other meeting" — September already hiked, October skipped, December hikes again.
New York Fed President John Williams explicitly said there is "no urgent need to act in October" and hinted at only one more hike this year, with no further tightening in 2027; Fed Vice Chair Philip Jefferson said policymakers may need more time to assess the data; Governor Waller summed up the stance: rate hikes "need not come at consecutive meetings, but should arrive within a reasonable timeframe."
The FOMC minutes corroborate this framework: all 19 officials supported the September hike, and a "majority" deemed one more hike this year appropriate. That means December is the compromise landing spot, and October was never truly in the discussion — even though Warsh's own prior public speeches did not explicitly rule it out.
Hawkish dissent: three opposing votes may reappear
Standing pat does not mean internal unanimity. Multiple institutions expect several hawkish dissents at this meeting.
Rabobank and Natixis both expect the three hawkish members who voted against the pause in July — Cleveland Fed President Beth Hammack, Dallas Fed President Lorie Logan and Minneapolis Fed President Neel Kashkari — to join forces again in favor of a 25 basis point hike this meeting. JPMorgan chief U.S. economist Michael Feroli expects at least two dissents (Hammack and Logan), with Kashkari a possible third.
The hawks' case has support. Logan believes rates need to go "50 basis points or more" higher; Hammack stresses the need to "move to restrictive territory soon, and preferably in smaller, quicker steps"; Boston Fed President Susan Collins (not a voter this time) also noted the probability of a scenario where inflation stays significantly above the 2% target is rising.
ANZ economist Brian Martin is the most prominent hawkish voice on Wall Street this week. In a note he cited the standard Warsh himself set in his Jackson Hole speech: "The FOMC must be confident that underlying inflation is moving toward target at a clear and sufficient pace, or our work is not done." He argues the September CPI data did not provide that confidence and that the market is significantly understating the odds of a hike this meeting.
BofA goes contrarian: an all-in bet on an October hike
Amid a market consensus that almost every institution expects a pause, Bank of America is a rare outlier.
According to the FOMC preview from BofA's rates and FX research team, BofA economists maintain their October hike forecast, arguing persistent inflation pressure should drive the Fed to keep tightening — though the team concedes that market pricing reflects a Fed "willing to wait until after the election" and confident in a dovish inflation forecast.
The BofA research team notes that a surprise hike would be the largest hawkish surprise since 2009 when market pricing was at its lowest (about 3 basis points); historically, 90% of hawkish surprises occurred when prior market pricing was at least above that level. BofA believes such a move would send 2-year Treasury yields surging 15-20 basis points and sharply flatten the curve.
BofA maintains its core trades of short 2-year Treasuries and 2s30s curve flatteners. Even if the outcome is a pause, the team argues that if Warsh's press conference messaging is insufficiently clear, the 2s30s curve could bear-steepen by 5-7 basis points — about half the 12.5 basis point steepening seen after the July FOMC.
Goldman Sachs: the hiking cycle ends in December
Goldman Sachs economists are among the most dovish on Wall Street, with a base case that the tightening cycle ends after one more hike in December; analysts view the cumulative 75 basis points of hikes priced for 2027 as too aggressive.
Goldman's core argument is that the sources of above-target inflation are temporary. By David Mericle's estimate, tariffs, the Iran energy shock and statistical mis-measurement of AI-related prices together explain the entire 1.1 percentage point deviation of core PCE from the 2% target. As these factors fade, Goldman expects core PCE to fall back to about 2.2% by the end of 2027.
However, the latest San Francisco Fed data challenge the logic of "waiting for inflation to fade on its own."
Citing that data, Apollo Global Management chief economist Torsten Slok points out that of the current 3% core PCE inflation, demand-driven and supply-driven factors each account for half — whereas in 2022 supply was the dominant factor. Slok stresses that interest rate policy can cool demand-side inflation but has limited effect on supply shocks, meaning half of today's inflation may not be resolved by waiting alone.
On upside risks, Goldman pays particular attention to energy prices. Oil is currently above Goldman's own forecast, reflecting market worries about further deterioration in the Middle East. If oil follows the futures curve, core PCE inflation would be about 0.1 percentage point higher and headline inflation about 0.4 percentage points higher by March next year. Goldman therefore does not rule out a March hike, though it is not the base case.
Warsh's dilemma: the press conference is the real test
The decision itself is barely in doubt; the market's real focus is Warsh's press conference performance. At the July press conference, when pressed on why not hike, Warsh said the data's influence on the decision was, "in two words, 'not much,'" which immediately triggered the first wave of a long-bond selloff.
Natixis expects a "short press conference, no Q&A and no in-depth explanation"; Goldman economists likewise "do not expect substantive new information from the press conference." Goldman head of U.S. rates strategy Will Marshall says the key is how much time Warsh devotes to inflation versus financial conditions: more emphasis on inflation would reinforce curve flattening and push front-end rates higher; more emphasis on tightening financial conditions could steepen the curve again.
Michael Feroli offers Warsh a workable script: say "the committee leans toward hiking but wants more time to observe how last month's hike transmits through the economy." Feroli immediately notes the contradiction — that is essentially forward guidance, which Warsh has explicitly refused to provide. His warning is telling: a hold decision made less than a week before the midterm elections and against hot inflation data, if not fully explained, will inevitably lead markets to associate policy with non-economic factors.
On statement language, Goldman expects the FOMC may borrow from Vice Chair Jefferson's recent speech, using wording such as "any further adjustments in rates will depend on data trends, the evolving outlook and the balance of risks." If Warsh deems that too close to forward guidance, another option is to stay completely silent on the policy path.
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