Warsh eases fears of October Fed hike despite inflation risks

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Fed rate hold bets rise

Highlights

October Fed hike odds fall from 27% to below 15%.
Warsh sees AI investment boosting demand before productivity.
Goldman Sachs expects a pause in October and a December hike.

Speaking Friday at the International Monetary Fund's annual meetings in Bangkok, Warsh emphasized the Fed's commitment to price stability but avoided indicating how he would vote at upcoming meetings. The probability of a quarter-point increase at the October 27–28 meeting fell from approximately 27% to below 15% after his appearance, according to Bloomberg.

Warsh remarks reinforce expectations of an October pause

The shift in market pricing followed a September rate increase of 25 basis points, the Fed's first hike since 2023. All 19 policymakers supported that decision, while a majority anticipated another increase before year-end.

Warsh indicated that economic developments since September had broadly matched the central bank's expectations. He offered no fresh assessment suggesting policymakers needed to act immediately.

Other Fed officials have recently acknowledged that additional tightening may be necessary but have emphasized the value of reviewing incoming economic data.Economists at Goldman Sachs, led by Jan Hatzius, interpreted the latest comments as consistent with an October pause. They continue to expect one final quarter-point increase in December.

Financial markets responded quickly. S&P 500 futures reversed earlier losses and gained 0.2%, while the dollar edged lower as traders reduced expectations of near-term monetary tightening.

AI investment raises new questions for monetary policy

Kevin Warsh also addressed the economic consequences of artificial intelligence, describing it as a potentially transformative source of productivity growth.

He distinguished between its immediate and longer-term effects. Heavy investment in data centers, computing equipment, and related infrastructure is increasing demand now, while improvements in productivity could eventually expand the economy's capacity to produce goods and services.

That distinction matters for monetary policy. Stronger investment spending could add to inflationary pressure before the productivity benefits of AI become widespread.

Warsh also acknowledged uncertainty about how the technology will affect employment. The Fed's task force on productivity and jobs will examine those questions at a November 16 hearing in the San Francisco Bay Area.

December rate decision remains in focus

A pause in October would not necessarily mark the end of the Fed's tightening cycle. September's unanimous increase and projections for further action show that policymakers remain concerned about inflation.

The sharp decline in October hike expectations nevertheless gives financial markets a clearer near-term outlook. Lower probabilities of immediate tightening can support equity valuations, particularly among companies whose growth plans depend on substantial financing.

Investors will now look to incoming inflation, employment, and spending figures to determine whether December remains a realistic date for another increase.The Fed must also assess whether AI-driven investment is creating temporary demand pressure or lasting improvements in economic capacity. That judgment could influence how aggressively policymakers respond to inflation over the coming months.

We also reported the Fed signals wait-and-see stance on further rate action.

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