Chair Kevin Warsh has to make a U-turn in communication
Federal Reserve Chairman Kevin Warsh speaks during his news conference in September.
The headline coming out of the Federal Reserve's meeting Wednesday will be the central bank's decision on interest rates, but what really matters to investors, economists say, is for Fed Chairman Kevin Warsh to prove he can successfully communicate the central bank's strategy.
Analysts want to know whether the hot inflation readings for September were a game-changing development, and what criteria the Fed will use to assess the timing and pace of subsequent rate hikes. They'll be watching Warsh's press conference Wednesday for signs that the central bank has a strategy for curbing prices after more than five years of inflation above its 2% target.
"The market cares about the final destination," more than the outcome of Wednesday's meeting, said Juhi Dhawan, global macroanalyst at Wellington Management.
Right now, the market expects a "shallow" Fed tightening of up to three rate hikes by the end of the first quarter of 2027. There have been many periods when the Fed has tightened only a few times, she said. That strategy fits with the narrative that the Fed is reversing the three cuts the central bank made last year over concern about the labor market.
There's a possibility they could take a more aggressive approach with a full rate hike. A "full" rate-hiking cycle would be 150 or 200 basis points, Dhawan said, which would take rates back up to the highest levels since 2023.
Derek Tang, co-founder of forecasting firm LH Meyer, said the market has a very difficult time understanding when the rate hikes will end.
"Do the hikes end when inflation literally is at 2%?" Tang asked.
Previous Fed chairs have provided a forecast, such as saying something like: The Fed can hike until underlying inflation gets low enough and then the central bank will hold rates steady. But Warsh hasn't provided any signals about the Fed's approach.
"It is a little bit of a black box," Tang said. "He's become quite skilled at giving non-answers."
The ultimate level of rates will impact borrowers and homebuyers. If rates go high enough, it could even choke off the current economic expansion.
A less-is-more approach
When Warsh came into office in May, he installed a sea change in Fed communication that can best be summed up as "less is more." A quieter Fed would let the market speak louder, he said.
This approach has proven to be a mistake, said Nicholas Economides, a professor of economics at the Stern School of Business at New York University.
"The new Fed chair has missed his chance to define policy coherently by proposing to 'listen to the market,' when the market in fact wants to listen to him," Economides said in an interview.
Warsh's silence on his views on the path forward for interest rates essentially gives away the Fed's authority to the market, he added.
"Unless the Fed speaks authoritatively, over and above what market considerations are, it will just lose its voice," Economides said.
He pointed to market moves after the Fed's September rate hike as an example.
At his September press conference, Warsh declined to answer whether he thought the first hike in three years would be a one-off event or the start of a series of hikes.
Without any guidance, markets pushed interest rates on longer-term Treasurys significantly higher, with the 10-year yield rising to 5.3%, as the market priced in an aggressive Fed with a rate hike in October.
-Greg Robb
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