Rate Hike Odds Tumble After Warsh Does Not Address October FOMC Meeting

In our morning wrap we said that market sentiment was boosted overnight following Kevin Warsh’s speech at the IMF meeting in Bangkok, specifically “The day’s driver is Warsh (or rather what he didn’t say): with the blackout starting Saturday, the Fed chair declined to push back on rate expectations and instead talked up a “massive investment surge” from AI.”

Goldman set the context, with its chief economist Jan Hatzius writing in a note overnight that in comments at the IMF’s annual meetings, Fed Chairman Kevin Warsh did not specifically address the FOMC’s upcoming October meeting but said that “in the intermeeting period, the world has broadly conformed to our expectations [at the September meeting].” Hatzius adds that “alongside other recent comments from FOMC participants, Warsh’s comments indicate that the FOMC is set to pause in October. We continue to expect a second and final hike in December.“

Below we excerpt the highlights from Goldman’s note:

• In comments at the IMF’s annual meetings, Fed Chairman Kevin Warsh did not specifically address the FOMC’s upcoming October meeting but said that “in the intermeeting period, the world has broadly conformed to our expectations [at the September meeting].”
• In other recent comments from FOMC participants, Fed Vice Chair for Supervision Bowman said, “I don’t feel any urgency for taking further action at this point.” San Francisco Fed President Daly, speaking after the firmer than expected September CPI report, likewise said that she did not see an urgent need “to decide with a limited set of information.”
• Taken together, these comments indicate that the FOMC is set to pause in October. We continue to expect a second and final hike in December.
• In other comments during his fireside chat, Warsh highlighted that the US is experiencing “a massive investment surge” related to the AI buildout. He also noted that there has been a “synchronous tightening in monetary policy around the world” recently. 

Warsh’s comments, or rather lack thereof, coupled with the market’s interpretation that his lack of priming an October hike (which is hardly surprising for a Fed chair who has repeatedly refused to offer forward guidance) means one isn’t coming, was enough to send October rate hike odds sharply lower, or 13%, less than half where they were before Warsh…

… even as odds of a December rate hike rose to new contract highs.

One possible reason for the market’s near certainty that a rate hike is coming in the year’s final FOMC meeting: the Bloomberg Economics Federal Reserve Sentiment Index continues to rise, now at its highest level since 2023

More in the full Goldman note available to pro subs.