Traders are betting overwhelmingly that the Federal Reserve won't raise interest rates when it meets later this month. But that judgment rests in part on assumptions about how the Fed communicates that may no longer hold under its new chairman. Kevin Warsh has left room to maneuver toward a hike, should he choose to use it.
To be clear, Warsh said outright at an International Monetary Fund event in Bangkok Friday morning that he wasn't signaling a decision one way or the other. His remarks nonetheless reinforced a judgment in the markets that the Fed would pause its rate increases, with the futures market assigning a 15% probability to an October hike as of Friday morning. That judgment follows remarks by other Fed speakers, including the chair's traditional top lieutenants, who indicated they were comfortable holding.
There are good reasons for investors to expect the Fed to wait. But there is also a case in the inflation data that Warsh could invoke to push the Federal Open Market Committee toward an increase on Oct. 28. Investors are overlooking that case based on longstanding past experience with the Fed.
But the chairman has repeatedly rejected the convention of telling markets what he plans to do before the committee meets. That raises the possibility that investors are dangerously complacent about the probability of a rate hike in October.
That complacency rests on a few bases. One is that the chairman's top lieutenants speak for him, or at least wouldn't contradict him in public. That was true in the past, but may not be so anymore.