Federal Reserve Chairman Kevin Warsh holds a press conference after the two-day meeting of the Federal Open Market Committee (FOMC) at the Federal Reserve in Washington, DC, USA September 16, 2026.
Evan Vucci Reuters
Traders are betting heavily that the Federal Reserve will not raise interest rates at its meeting later this month. But that judgment rests on assumptions about how the Fed communicates that may no longer exist under a new chairman. Kevin Warsh has left room to maneuver into the climb, if he chooses to use it.
To be clear, Warsh said directly at the International Monetary Fund event in Bangkok on Friday morning that he did not signal the decision in any other way. However, the comments reinforced the market’s decision that the Fed will pause on rate hikes, with futures giving a 15% chance of an October hike on Friday morning. The court followed comments from other Fed speakers, including the chair’s traditional top lieutenant, that showed they were comfortable.
There are good reasons for investors to expect the Fed to wait. But there’s also a case in the inflation data that Warsh could use to push the Federal Open Market Committee toward an October 28 hike. Investors don’t see the case based on their long past experience with the Fed.
But the chairman has repeatedly rejected the convention of telling the market what to do before the meeting committee. That raises the possibility that investors are dangerously satisfied with the possibility of a rate hike in October.
That satisfaction rests on several foundations. One is that the chairman’s top lieutenants speak for him, or at least will contradict him in public. That was true in the past, but that may no longer be the case.
In recent weeks, both Fed Vice Chairman Philip Jefferson and New York Fed President John Williams have made comments indicating that they see no urgency to raise interest rates. The market quickly repriced in favor of holding in October.
Warsh, Jefferson and Williams formed an informal decision-making team at the top of the Fed known as the troika. Warsh might be able to coordinate with the troika even if he doesn’t believe he can make up his own mind. But outsiders can’t be sure whether the traditional conventions surrounding public statements by the New York Fed president and Fed vice chairman have survived the leadership transition.
Another assumption is that Warsh broadly accepts the FOMC’s views on the economy. “The world has largely matched our expectations,” Warsh said in Bangkok on the economy since September.
That can be read as saying that the relatively warm inflation reading of the consumer and producer price index in recent days does not invalidate the view expressed in the latest Economic Summary of the Fed released at the conclusion of the September meeting. At the time, the median Fed official believed there would be another rate hike in 2026 — which leaves room for a pause in October and another hike in December.
But Warsh walked out of a September press conference to deny the SEP. “This is not my prediction,” he told reporters.
Warsh set out his own idiosyncratic reading of the economy in detail in a closely watched speech in Jackson Hole, Wyoming, in late August. This reflects strong economic growth, with inflation more of a concern than the job market. Warsh’s view was too hawkish to prepare the FOMC to raise interest rates in September. Their hawkish position hinges heavily on what they see as loose credit conditions.
The Chicago Fed’s Index of National Financial Conditions has risen about 0.05 points since Jackson Hole but remains negative, indicating financial conditions are tightening but remaining loose overall.
Does Warsh believe the market has done his work for him? Has it “removed the dose of accommodation,” as he said on Thursday, enough? We can deduce the answer, but we won’t know until the FOMC press conference.
Then there is the inflation data. The consumer price index rose 3.7% for the year to September, while the producer price index gained 6.3%. The new data suggests that the next reading of the Fed’s preferred inflation reading, core personal consumption expenditures, will come in at 3.1% annually. Headline PCE, which will be affected by energy prices, will be higher.
Warsh has gone out of his way to say that the figure at that level is a problem. After economists asked whether Warsh could tolerate inflation above 2%, he was vague in Jackson Hole: “There is no misunderstanding,” Warsh said. The Fed’s 2% PCE goal “is a fixed and fixed target.”
Warsh seems to be learning on the job. He will probably soon realize that the Fed chairman cannot run alone and must rely on his staff and the rest of the FOMC to help him do his job. In addition, they may find that markets do not emit clear signals independently of the Fed.
Raising rates when the market is highly optimistic is a recipe for volatility. These factors led to interventions by officials like Jefferson and Williams in the past. Surprise decisions after appearing to lead the market can reduce credibility and make the Fed’s decisions more difficult to predict.
But how Warsh will solve the problem is not yet clear. Warsh may enter the October meeting with the goal of bolstering committee members based on booming demand for AI spending and a hot read on inflation data. Or he can sit and approach the middle of the committee if he evaluates his opinion.
Warsh still has the potential to surprise us, and it is risky to assume otherwise.