Instant Reaction: Fed Stands Pat, Says More Data Will Help Next Decision

Warsh's Fed Holds Rates but Leaves Markets Guessing

The Fed under Kevin Warsh held rates at 3.75% to 4% while sounding hawkish, and left markets unsure what data would trigger a move. Warsh wants less forward guidance, fewer dots and shorter press conferences, but the committee's core still shaped expectations through speeches. Markets still price three hikes, and the Fed's attention to financial conditions and AI-driven wealth effects is the clearest signal of how it now thinks.

Takeaways

• Fed held at 3.75% to 4% despite hawkish tone. The statement said more information will help set policy for a timely return of inflation to 2%. Ferro sees a disconnect between Warsh's hawkish rhetoric and a hold, after data many on Wall Street read as pointing to a hike.
• Warsh's reaction function is now unclear. Warsh called this period information rich and described a new regime, but did not explain the decision or discuss the data much. Abramowicz says nobody knows what data the Fed is waiting for, which leaves economists struggling to adapt.
• Markets still expect hikes. Misra of J.P. Morgan says markets still price in three hikes. She reads the hold as a hawkish hold and as risk management against a supply shock spreading, since the market did not think the Fed was behind on inflation.
• Real guidance came from the committee core. Ferro argues Warsh wants to end hyper-communication but is trapped in the post-financial-crisis framework. Williams and Jefferson speeches gave the real guidance, and the new Fed sounds like the old one, willing to tolerate above-target inflation.
• Financial conditions and AI are central to the Fed's thinking. Rosenberg of BlackRock says Warsh discussed financial conditions at length and tied them to AI. Consumption is powered by the wealth effect, and Warsh is more focused on markets than people assume. The steepening curve is a mild dovish hint.
• Warsh wants a less communicative, less frequent Fed. Warsh wants to move away from the dots and frequent meetings, with the press conference cut from about an hour to 30 minutes. Keene sees nostalgia for the Martin era, while Misra says today's news flow makes that return impossible.
• Market reaction was muted and the curve steepened. The S&P 500 rose about a third of 1% and the Nasdaq 0.4%. The two-year yield fell three basis points, while ten-year yields rose four and thirty-year yields rose five. The dollar weakened.

Data and events before the next decision

• PCE data is due the day after the meeting.
• One more CPI report arrives before the December meeting.
• McKee notes oil prices are rising and the war is still going on.