Warsh strengthens expectations of October Fed rate pause

Federal Reserve Chairman Kevin Warsh indicated on Friday a potential pause in US interest rate hikes for October, despite inflation staying above the central bank's target. At the International Monetary Fund and World Bank annual meetings in Bangkok, Warsh did not suggest any further rate increases but reiterated the Fed's commitment to price stability.

Traders revised the likelihood of a rate hike at the upcoming Federal Open Market Committee meeting from around 27 percent to under 15 percent after his remarks. US stock futures rose and the dollar weakened as investors interpreted his cautious stance as a sign of a possible rate freeze. The Federal Reserve had raised its benchmark rate by a quarter percentage point in September, its first increase since 2023, bringing the target range to 3.75 to 4 percent.

All 19 policymakers backed the move, with several expecting another hike before the year's end. Warsh noted that the Fed had already taken some support out of the economy through the September decision and emphasized that officials would review conditions at each meeting rather than committing to a set sequence of rate changes. He cautioned against predicting the Fed's actions publicly.

Warsh's comments followed stronger-than-expected US inflation data, leading investors to reconsider the possibility of another rate increase this month. The Fed's decision to maintain rates steady in October would give them more time to evaluate if the September increase is enough to curb demand. Goldman Sachs economists suggested Warsh's comments, combined with statements from other officials, pointed to an October pause, but they still anticipate a potential quarter-point increase in December, depending on new economic data.

Warsh's remarks came as the Fed grappled with the challenges of rising prices and the impact of rapid artificial intelligence adoption. He called AI an exceptionally important economic development but warned that its immediate effects might not match its long-term benefits. Increased AI investment could fuel demand before productive capacity catches up, potentially complicating the inflation outlook.

Warsh highlighted the need for policymakers to carefully assess temporary disruptions against more permanent shifts in the economy, especially regarding employment. He also announced that the Fed's task force on productivity and jobs would hold a field hearing in San Francisco on November 16 to discuss the impact of technological advances on productivity and employment, which will inform the Fed's assessment of structural economic changes.