Attention is turning to the U.S. Federal Reserve's next policy move after data showed inflation pressure in the world's largest economy has yet to ease, driven by a surge in energy prices stemming from the war in Iran. A higher-than-expected September consumer price reading has revived the possibility of an interest rate increase in October, but caution over the timing of further tightening remains strong both inside the Fed and among market analysts. With uncertainty mounting over the rate decision later this month, global financial markets are focused on the message Fed Chair Kevin Warsh will deliver at the annual meetings of the International Monetary Fund and the World Bank.
Warsh will hold a conversation with IMF Managing Director Kristalina Georgieva at 10:30 a.m. on the 16th in Bangkok, Thailand, where the IMF and World Bank annual meetings are being held, according to Bloomberg and The Wall Street Journal on the 14th. The two will discuss how the spread of artificial intelligence and the energy shock are affecting central bank policy and the global economic outlook.
The conversation is drawing attention because the Fed enters its so-called blackout period on the 17th, ahead of the Federal Open Market Committee meeting on the 27th and 28th. The blackout is a stretch during which Fed officials refrain from public comments that could influence monetary policy decisions. That makes Warsh's appearance the last public remarks by a senior Fed official before the window closes.
Markets had largely expected the Fed to hold rates steady in October before moving to another increase around December. Although the Fed raised its benchmark rate last month for the first time since 2023, the view had been that policymakers needed more time to assess inflation, employment and other economic data before tightening again. New York Fed President John Williams and Fed Vice Chair Philip Jefferson have also signaled there is no need to rush a rate increase.
The mood shifted somewhat after the September inflation data. The consumer price index rose 3.7% from a year earlier, above market expectations of 3.6%, according to the U.S. Bureau of Labor Statistics. Core CPI, which strips out volatile food and energy prices, climbed 2.6%, also topping the 2.5% forecast. Along with the jump in energy costs, prices rose broadly across used cars, medical care and other categories. The probability of an October rate increase, which had stood at about 20%, briefly spiked to 55% after the CPI release. It has since eased to around 40%, but markets have begun weighing the chance of further tightening this month.
"Investors are watching whether Warsh will say something that supports the case for further rate increases," said Meghan Swiber, a U.S. rates strategist at Bank of America, adding that the breadth of the price gains will make it harder for the Fed to dismiss them as temporary.
Still, there is considerable sentiment within the Fed that another rate increase requires careful deliberation. San Francisco Fed President Mary Daly, in an interview with Reuters the same day, acknowledged the possibility of further increases to counter inflation but was noncommittal about action this month. "It is more likely than not that additional policy adjustment will be needed," Daly said, while adding that "the timing of that adjustment is still under discussion." She also stressed that there is no need to rush a decision based on limited information, saying the central bank has ample time.
Some also point to the limits of using rate policy alone to address inflation rooted in supply shocks. Price pressure arising on the supply side, such as disruptions to energy supplies caused by the war, is difficult to resolve solely by curbing demand through higher rates. That has raised concern that excessive tightening could weigh on the economy without bringing inflation down sufficiently.
On that point, Warsh said at the September FOMC meeting that the Fed cannot influence individual prices, whether for oil or food, but that what it can and must do is prevent changes in relative prices from spreading through the broader economy and producing second- and third-round effects.
Whether Warsh will offer a concrete signal on the path of rates remains unclear. He has said he intends to move away from the practice of Fed chairs telegraphing direction to markets ahead of policy decisions. The Wall Street Journal noted that with the October decision far harder to predict than before, investors could head into the Fed's blackout period split between expectations for a hike and a hold if Warsh gives no signal at all.