Kevin Warsh is pushing the Federal Reserve to introduce a monetary policy strategy meeting.
At 2 a.m. Beijing time on Thursday, the Federal Reserve announced its October interest rate decision. The Federal Open Market Committee (FOMC) voted 10-2 to keep the federal funds rate target range at 3.75%-4.00%, in line with market expectations. Fed Chair Kevin Warsh stated that financial conditions have tightened since the September rate hike, that the price stability mandate is the priority, and that employment conditions are quite positive.
At the same time, the pace of Federal Reserve reform is deepening. He revealed that by 2028, the number of FOMC meetings that vote on interest rates will drop from the current eight to six, with two strategic policy meetings introduced. Currently, the market widely expects the Fed to resume rate hikes in December, with rates to be raised by 25 basis points at that time.
Strong Economic Expansion, Elevated Inflation Pressure
The decision statement showed that economic activity is expanding at a strong pace. Although uncertainty remains high due to geopolitical developments and other reasons, domestic spending has shown strong resilience. Productivity growth is robust, and capital investment is solid. Job growth has kept pace with the labor force, and the unemployment rate has changed little. The Committee decided to maintain the target range for the federal funds rate at 3.75% to 4% to support the Fed's dual mandate. The Committee will continue its policy of maintaining ample reserves in the banking system.
Inflation remains elevated. As more information accumulates, the Committee will be able to determine the appropriate policy stance to ensure inflation returns to the Committee's 2% target in a timely manner. The Committee will achieve price stability.
At the start of the press conference, Warsh said that after the 25 basis point rate hike at the September meeting, there have been signs that financial conditions have tightened since then. "We have begun to see some changes in financial and credit conditions; for some businesses and households, they have tightened, which is in line with our expectations, and market participants are becoming more discerning in capital allocation."
Speaking about economic conditions, Warsh said, "Economic growth has strengthened. GDP growth in the first half of this year was revised up from the previous estimate of 1.8% to 2.4%, and the third quarter appears to have brought even faster growth."
The dissenting votes in this monetary policy action came from Fed Governor Cook and Cleveland Fed President Hammack, who wanted the target range for the federal funds rate to be raised by 25 basis points at this meeting.
The Fed Chair said that discussions in recent days mainly focused on the price stability side of our mandate. As before, Warsh did not provide guidance on the monetary policy outlook, but acknowledged that price stability has not yet been achieved. "We are working on it," he said. "I don't believe in prejudging; many things can happen, so I cannot share with you my thoughts on what will happen when this group meets again in six weeks."
Warsh denied that political factors influenced the decision. "I just spent two days with my colleagues upstairs. I did not hear a single word about politics. I did not hear any mention of politics, elections, or what will happen in the next week or so, and I do not think it played any role in the decision, not only for me but also for my colleagues in the room," he said.
Warsh said that higher interest rates have already affected the construction of artificial intelligence infrastructure. He plans to attend a field hearing of the central bank's Productivity and Employment Working Group on November 16 in the San Francisco Bay Area to hear from various people on issues related to technology and productivity and their impact on monetary policy. The meeting will explore the short-term, medium-term, and long-term effects of AI-driven productivity on the economy. "Is this a productivity miracle that will happen, or will it happen slowly? I know that personally, I very much hope to refine my view on this question," Warsh said. "Will this make it harder or easier for us to achieve price stability in the coming years? What about the impact on employment, in the medium and long term, but also in the short term? So we will discuss these issues mainly in public on November 16."
Major Agenda Adjustment
Fed Chair Kevin Warsh said that in the future the FOMC will reduce the number of meetings at which members vote on interest rates. "We believe eight meetings per year is an appropriate number for the FOMC, but in 2027, one meeting will focus specifically on broad monetary policy strategy, and it is expected that there will be no vote on the federal funds rate and no policy statement, while the rest will be regular FOMC policy-making meetings. I expect that in 2028 we will have two meetings dedicated to strategy and six for policy making."
He said it is not yet clear what the Fed will publish after these meetings. "There will be more news on this front," Warsh said. "The decision on the new format of the meetings is relatively new. There have been several full and in-depth discussions about how to handle these meetings."
Warsh later added that at these policy meetings focused specifically on broad strategy, he does not expect the Fed to make rate decisions or issue statements. "What is the rationale behind this change? For me, it is the need to assess recent developments at timely, regular, and well-informed intervals. Equally important, as a diverse team, we need to leave time and space for strategic deliberation, to rethink major issues over a longer time horizon, and, as I said, to focus on the part to the left of the decimal point (that is, the long-term big picture)."
Warsh emphasized the importance of a "paradigm shift" at the Fed, a process that includes establishing multiple working groups to examine how the Fed operates. One of the working groups will address communication issues. The change in the meeting schedule appears to be the first step in the Fed's process of shifting its thinking. "I think the setting of the meeting calendar and agenda is not just some administrative detail. It is an institutional choice that affects the nature and quality of our deliberations and ultimately affects how wisely we make decisions. This is another change that puts monetary policy on the right track."
Policy Outlook
The outcome of this week's meeting was widely expected, as several senior Fed officials had previously said they saw no urgency for another rate hike. The Fed's decision will also be discussed across the November 3 midterm elections. Energy costs remain high, including diesel fuel, which is an important input for shipping, agriculture, and other industries. Inflation and the cost of living have been central to political campaigns determining whether Trump's Republican Party continues to control both chambers of Congress, or whether Democrats retake leadership positions and gain stronger oversight powers, including oversight of the Federal Reserve.
Financial market attention has shifted to the pace and magnitude of future rate hikes. Economists and many Fed policymakers now believe that price increases are due not only to Trump's decision to attack Iran and the ongoing effects of his tariffs, but also to strong demand from the AI industry and healthy consumer spending. Dario Perkins, managing director of global macro at TS Lombard, wrote in a research note: "The question now is no longer whether the Fed will hike again, but how many more hikes there will be." If the AI bubble does not burst, the Fed may be forced into a series of rate hikes.
Federal funds rate futures pricing shows that the market expects the Fed to raise rates by 25 basis points in December and by another 25 basis points in March next year. A review by Yicai reporters found that institutional views are somewhat divided. While a December hike is broadly expected, Morgan Stanley, Citi, and MUFG believe the Fed's current tightening cycle will end there, and that as inflation gradually falls, rate cuts will restart in the second half of 2027 or in 2028. In contrast, Barclays, UBS, and Danske Bank believe there will be one more hike in the first quarter of next year, with the terminal rate ultimately landing in the 4.25%-4.50% range, and they do not rule out the possibility of further tightening.
Tiffany Wilding, an economist at Pacific Investment Management Company (PIMCO), believes a 25 basis point hike in December is the most likely policy path, but AI investment is less sensitive to changes in interest rates, and continued rate hikes would first weigh on traditional real estate and corporate sectors. The Fed has reason to take a gradual approach and observe the lagged effects of previous financial condition tightening on the economy.
Comments