Traders are overwhelmingly betting the Federal Reserve will hold interest rates steady when it meets later this month, but those assumptions may rest on shaky ground.
Futures markets assigned just a 15% probability to an October rate hike as of Friday morning, reflecting widespread confidence that the Fed will pause its tightening cycle.
That confidence follows remarks from senior Fed officials, including Vice Chairman Philip Jefferson and New York Fed President John Williams, who both signalled little urgency to raise rates further.
Jefferson and Williams, alongside Chairman Kevin Warsh, form an informal decision-making group at the top of the Fed commonly referred to as the troika.
However, Warsh has repeatedly rejected the longstanding convention of telegraphing policy decisions to markets before the Federal Open Market Committee convenes.
Speaking at an International Monetary Fund event in Bangkok on Friday, Warsh said he was not signalling a decision in either direction, yet his remarks still reinforced market expectations of a pause.
Warsh has previously gone out of his way to distance himself from the FOMC’s collective forecasts, telling a reporter at the September press conference bluntly: “Those aren’t my forecasts.”
The inflation data presents a live case for another increase, with the consumer price index rising 3.7% annually through September and the producer price index gaining 6.3%, its biggest jump since 2022.
Those figures imply the Fed’s preferred inflation gauge, core personal consumption expenditures, will come in at approximately 3.1% year over year in the next reading.
Warsh addressed concerns that he might tolerate above-target inflation directly during his closely watched Jackson Hole speech in August, leaving no ambiguity about the Fed’s stated goal.
“There should be no misunderstanding,” Warsh said at Jackson Hole, adding that the Fed’s 2% PCE target “is a firm, fixed target.”
Warsh’s hawkish stance at Jackson Hole set up the FOMC to unanimously raise interest rates in September, driven in part by his assessment of loose financial conditions in credit markets.
The Chicago Fed’s National Financial Conditions Index has risen roughly 0.05 points since Jackson Hole but remains negative, indicating conditions have tightened but are still loose overall.
At the Bangkok event, Warsh acknowledged that “the world has broadly conformed to our expectations” since September, a remark markets interpreted as consistent with holding rates steady.
Yet outsiders cannot be certain whether traditional conventions surrounding public statements from the New York Fed president and the vice chair have survived the leadership transition under Warsh.
Raising rates while markets strongly expect otherwise would likely trigger significant volatility, a factor that has historically prompted interventions from officials like Jefferson and Williams.
A surprise decision after those officials appeared to guide markets toward a hold could damage their credibility and make future Fed decisions even harder for investors to anticipate.
Warsh could enter the October meeting ready to push wavering committee members toward a hike, citing strong AI-driven demand and persistently warm inflation readings, or he could defer to the broader committee’s views.
Until the FOMC press conference concludes on October 28, investors betting confidently on a pause may be underestimating the risk that Warsh still has a surprise in store.