Fed Holds Rates as Warsh Weighs Inflation, AI and December Hike Odds 10/28/26

Chen Carson

Fed won't deliver the December hike markets price; hawkish talk is credibility theater and the next move is dovish.

Nothing has changed since Jackson Hole to make Warsh more hawkish, and nothing has made him more dovish. Carson bets the December hike the market is pricing will not happen. He calls the Fed's inflation talk Kabuki theater aimed at gaining credibility and keeping the Fed looking independent. The real problem is the long end of the curve, which he says will force more dovishness from the Fed in the months and quarters ahead.

“I'm willing to bet that the coming quarter that they're gonna price in for December still also will not happen. This, in my opinion, is Kabuki theater at the end of the day.”at 6:30

Steve Liesman · CNBC

The election is not a data point the Fed will weigh in its rate decision.

Liesman says the election may affect the timing of the decision, because the Fed may want to wait until it is over. But whichever way the vote goes, he argues it will not determine what the Fed does afterward. He clarifies that David Kelly was not implying otherwise, but insists the election is not a data point the Fed cares about for its decision.

“The election is not a data point the Fed is going to care about in terms of making its decision.”at 9:11

Matt Peterson · CNBC

Warsh's colleagues' messaging moved hike odds without new data, suggesting forward guidance despite denials.

Peterson notes Warsh let other Fed officials, including Williams and Jefferson, deliver the message instead of speaking himself. The probabilities of a hike changed even though the data did not, which he attributes to this messaging. He argues this suggests the Fed is doing forward guidance even though Warsh says it is not, and that the Fed has tightened financial conditions since September, which is what Warsh wanted.

“the very fact that the probabilities changed when the data didn't was because of this messaging, which suggests that in fact, even though he says we're not going do forward guidance, actually, maybe they are doing forward guidance.”at 12:41

Matt Peterson · CNBC

Fed has moved rates six days before elections before, so election timing is not a barrier.

Peterson rebuts the idea that the Fed avoids moving rates right before an election. He cites a 75 basis point hike in 2022 and a half-point cut in 2008, both six days before an election. He acknowledges those were very different environments, but argues the claim that the Fed does not act before elections does not hold up.

“75 basis point hike, six days before an election, exactly where we are now. 2008, half point cut six days before an election. Those were two very different environments.”at 19:38

Steve Liesman · CNBC

Fed cannot stand by while inflation runs at 3% month after month; policy does affect the economy.

Liesman rejects the view that the Fed should do nothing because its moves won't matter. Rate policy works through aggregate demand, and weaker demand brings down parts of CPI. He says it is strange to expect 3% inflation month after month without a response. He argues the market pays close attention to the Fed because it can affect the economy, and that the Fed risks losing credibility if it stands by.

“it would seem very strange for inflation to come in 3% month after month and to think the Fed should do nothing because you believe it won't have an impact. It will have an impact.”at 20:22

Joe Lavorgna

Warsh's push to drop forward guidance adds risk premium but gives the Fed flexibility and limits capital misallocation.

Lavorgna says Warsh wants to get rid of forward guidance. That adds a risk premium to markets, which people dislike. But he argues it gives the Fed flexibility and minimizes the chance of the kind of capital misallocation seen in the last few cycles. He also jokes that the dot plot can be changed at will, so it has little value.

“The chair really wants to get rid of forward guidance and add risk premium to the market, which you know, people don't like. But it does, I think, the Fed some flexibility. It minimizes the chance of great misallocation of capital.”at 26:53

David Kelly · J.P. Morgan Asset Management

Fed probably needs to hike in December; silence on guidance just adds a risk premium.

Kelly expects Warsh to use unnamed forward guidance to tell markets a December hike is likely, with hawkish remarks and a focus on incoming data. He prefers forward guidance to forward silence, which he says adds a risk premium the economy does not need. He says that as things stand, rates will probably need to move up a little more.

“that December is we're probably going to raise rates then... But as it stands right now, rates probably will need to move up a little bit more.”at 27:50

Kevin Warsh · Federal Reserve

Financial conditions have tightened for some borrowers, but he will not call overall conditions tight.

Warsh says financial and credit conditions have tightened for some businesses and households since the September action, as expected. Market participants are becoming more discerning in capital allocation. He says he is unwilling and unable to call overall financial conditions tight, and argues these developments point toward a longer, more durable period of growth and price stability.

“They have tightened for some businesses and households, much as we would expect... while overall financial conditions are tighter, I'm unwilling and unable to call them tight.”at 33:02

Kevin Warsh · Federal Reserve

Fed holds rates now because the coming information-rich period should clarify the appropriate policy protocol.

Warsh argues the Fed has put in place a new monetary package since taking over five months ago and is seeing early signs of progress on inflation compensation and expectations. He says there are no firm conclusions yet, and that a firm conclusion would be announced without fanfare. The Committee chose to take stock, evaluate the incoming data and ask whether the period ahead is likely to bring more clarity. His judgment, and that of an overwhelming number of colleagues, is that it will. He concedes the Fed has not yet achieved price stability.

“The period right in front of us is information rich... My judgment, the judgment of my overwhelming number of colleagues is that it would.”at 39:46

Kevin Warsh · Federal Reserve

Fed should not use forward guidance in normal times, only in crises, and he will not pre-judge meetings.

Warsh says he does not believe in forward guidance except in exigent circumstances or a crisis. He notes that forward guidance was helpful in the darkest days of the 2008 financial crisis, drawing on literature from a recent Nobel Prize winner. In ordinary times, especially when the underlying real economy is this strong, he does not favour it. He also does not pre-judge meetings, because many things can happen before the committee meets about six weeks later.

“I don't believe in forward guidance, absent exigent circumstances, absent a crisis.”at 58:18

Kevin Warsh · Federal Reserve

Balance-sheet changes are unlikely to have a material effect on the current policy conjuncture.

Asked about further balance-sheet shrinkage and its effects on foreign official Treasury holders and dollar funding markets, Warsh says the balance sheet is currently within the balance sheet task force's remit. The task force's recommendations are expected to reach the FOMC probably early in the first quarter. Any changes would follow serious consideration of those proposals. He says it is unlikely to have any material effect on the current policy conjuncture, but it is a question the Fed should get to the bottom of.

“I think it is unlikely to have any material effect on this policy conjuncture.”at 1:01:21

David Kelly · J.P. Morgan Asset Management

Inflation will moderate next year as oil flows return, tariffs fall, wages stay flat and rents soften.

Kelly expects a short Iran conflict to end and oil to flow again from Iran and the Gulf. He expects tariff rates to fall. He sees no wage growth despite a tight labor market and strong productivity growth. Rental vacancy is at its highest since 2014, which he expects to push rents down; rent is about a third of CPI. Together these point to inflation easing without the Fed needing to panic.

“But inflation will probably ease next year anyway... Also, tariff rates are gonna be going down. That helps. We don't have any wage growth. We've got strong productivity growth.”at 18:36

Steve Liesman · CNBC

Core inflation will keep running above 3% for the next two months, rising further as October prints.

Liesman models a 0.3% monthly rise in core PCE for the release due tomorrow, which takes the year-over-year rate to 3.1%. He adds that the Cleveland Fed inflation nowcast for October points to a roughly 0.25% gain, pushing inflation up again. He expects two more months of 3%-plus core inflation, extending a run of about five and a half of six years above target.

“I modeled in the 30 basis points that we're expecting for the PCE core to rise tomorrow. That brings the year over year rate to 3.1%.”at 20:46

Frances Donald · RBC (Royal Bank of Canada)

Inflation is not just energy: half of CPI and PCE items run above 3%, and half are demand-driven.

Donald argues the inflation problem is not just energy. Half of the items in the CPI and PCE basket are running above 3%. Per the Fed's own measurement, half of inflation is demand-side rather than supply-side. The Fed has a rule for containing high energy prices from spreading, so she expects it to explain why it is not moving forward and how much more it has to do. She does not expect a hike at every meeting.

“No. This is not just an energy story. Half of the items in the CPI and PCE basket are running above 3%. Half per the Fed's own measurement are demand side, not supply side.”at 26:25

Kevin Warsh · Federal Reserve

The Fed has no soft or implicit inflation target; its target is 2% PCE after six years of above-target inflation.

Responding to a Bloomberg question that households may read the hold as a soft inflation target, Warsh rejects any soft or implicit target. He says the target is price stability, measured as 2% on PCE. He acknowledges that it took six years of above-target inflation for inflation to have the effect on consumers that the question describes. He argues the Fed has doubled down on the target, taken responsibility and acted, and that households, businesses and markets still have confidence in price stability.

“there's no soft inflation target, there's no implicit inflation target, there's a target of price stability and it's 2% as measured by PCE.”at 51:27

Kevin Warsh · Federal Reserve

Near-term inflation expectations rose on gas prices, but longer-horizon expectations and market measures are anchored.

Warsh says near-term expectations rose because households see higher prices at the pump and are interrogating reality as the Fed does. Looking over the horizon, most but not all measures show households, businesses and financial markets have confidence the central bank will deliver price stability. Market-based inflation compensation measured by swaps and other prices is moving the right way. Expectations have also moved the right way, and he argues that without the Fed they might have gone the wrong way. He cites these as signposts that the new strategy is working.

“But if you look out over the horizon, if you look at most, but not all measures, what you see is households, businesses, financial markets, They have the confidence”at 52:13

Chen Carson

Long end of the Treasury curve is a structural problem, forcing Fed dovishness and a crisis backstop facility.

Carson argues the Fed's real problem is the long end of the curve, where it is being crowded out by debt issued by hyperscalers. Refinancing is also hitting 2021-vintage debt with five-to-seven-year duration. He adds that the unresolved Strait of Hormuz situation pushes the same way. He cites Hank Paulson's April warning of a coming Treasury crisis and expects the Fed to build a facility to respond, which he says will bring dovishness in the coming quarters.

“They have a problem at the long end of the curve at the end of the day... they're getting crowded out by all of the debt taken out by hyperscalers.”at 7:49

Jeff Blazek · Neuberger Berman

Bond market is in charge; Fed rate cuts would push real rates up, not down.

Blazek says the bond market feels like it is in charge. He argues that if the Fed cut rates, real rates would go up rather than down. He sees that as a credibility problem for Warsh, who he thinks understands this and is threading a needle. He thinks the credibility of the Fed is the bigger question.

“The bond market right now feels like it's in charge... I agree. That rates would go, real rates would go up. They would. Not down.”at 16:49

Kevin Warsh · Federal Reserve

Growth has strengthened: first-half GDP revised up to 2.4%, and Q3 likely above 3%.

Warsh says growth has strengthened. First-half GDP growth was revised up from 1.8% to 2.4%. The third quarter appears to have brought an even faster advance, likely above 3%, led by healthy consumer spending and business investment, with broadening across categories. He cites jobless claims at the lowest level in generations and payroll growth above last year's pace.

“Economic growth has strengthened. The GDP increase in the first half of this year was revised up from an earlier estimate of 1.8% up to 2.4%. And the third quarter appears to have brought an even more rapid advance”at 31:22

Kevin Warsh · Federal Reserve

US strength is broad-based: capex is broadening, so calling growth a narrow AI story is hard to sustain.

Warsh says it is convenient to attribute US economic strength to the new technology wave, but the data disagree. Using data from the last meeting through this one, he argues the capex story is not just robust and strong but broadening beyond the narrow AI pocket. He concludes that anyone claiming strength is confined to a few narrow areas faces a much harder case than they would have several quarters earlier.

“the CapEx story is not just robust, not just strong, but it is broadening.”at 56:32

Kevin Warsh · Federal Reserve

Capex is at a historically high share of GDP, with high-tech investment leading the acceleration.

Warsh says business investment is likely rising at about a double-digit pace in the third quarter. Capital expenditures are at a historically high share of GDP. High-tech investment is leading the acceleration, though other categories are broadening, and the Fed will watch these trends.

“Capital expenditures are at a historically high share of GDP. High-tech investment is leading the acceleration.”at 31:53

Kevin Warsh · Federal Reserve

Interest rates do affect the AI investment surge; markets are discriminating and some credit spreads have widened.

Warsh rejects the narrative that rate hikes would not affect AI because investors' expected returns are so different. He argues interest rates get into every crack and affect almost everything directly or indirectly. His evidence is market behaviour since early September: participants are discriminating between investments, credit spreads on certain assets have widened, and financial conditions have tightened for some others, though not significantly. He concludes rates do matter for the technology investment surge and are not divorced from the rest of the economy.

“Interest rates get in the cracks. Interest rates affect directly or indirectly almost everything.”at 55:14

David Kelly · J.P. Morgan Asset Management

Divided government after the midterms would likely bring lower tariffs and less fiscal stimulus next year.

Kelly argues that a divided government would let Congress push back harder on the president. That would likely lower tariff rates next year and reduce funding for further Middle East conflict. It could also mean no further fiscal stimulus, while a strong Republican government could bring more stimulus such as $5,000 checks. He concludes the policy agenda for next year will be shaped by the midterms.

“If you get divided government, then a, you may see lower tariff rates next year because congress will be able to push back harder on the president on that.”at 10:13

Frances Donald · RBC (Royal Bank of Canada)

Lower-middle-income consumers are struggling, saving less, borrowing more and facing rising delinquencies.

Donald argues the economy has become less sensitive to interest rates. Lower-middle-income consumers are struggling, saving less and borrowing more, and delinquencies are rising. A housing market in the doldrums adds to the picture. She argues that this makes explaining central bank policy much more complicated.

“You have a lower middle income consumer that is really struggling, that is saving less and borrowing more and seeing higher delinquencies come through.”at 14:33

David Kelly · J.P. Morgan Asset Management

Housing is flat on its back; rate hikes would hit only a sector already close to recession.

Kelly says housing is the only sector rates really affect. It is flat on its back with higher mortgage rates. Demographics are weak, with a large shortage of potential buyers, and homebuilders are struggling. Raising rates would therefore hit a sector already close to recession, while the Fed's worry is an overheating economy driven by technology, not housing.

“Because the only sector that really gets hit by rates much is housing. And housing is flat on its back right now with higher mortgage rates, but really a big turn in demographics.”at 15:28

Chen Carson

Rally-driven liquidity and leverage are capped, so earnings are likely to fall as liquidity stops rising.

Carson says roughly $250 trillion sits in public and private equities. A 10-20% market rise, like the one earlier this year, pushes about $50 trillion of new collateral into the market. That collateral drove earnings growth and more capex. As rates rose, bonds were crowded out and CDS spreads blew out. He argues the market is capped, and if the liquidity needed to keep pushing it higher is less likely to continue given the leverage, earnings are likely to come down and CDS and other markets could break.

“When the market goes up 10, 20% like it did earlier this year, you get a $50,000,000,000,000 push of new collateral in the market. That is what has drove a lot of the earnings growth, but it also has driven more and more CapEx.”at 22:18

Joe Lavorgna

The Fed watches AI full time; the boom is driving equities via wealth effects and reinforcing capex.

Lavorgna says the Fed is watching AI full time and every day. He argues AI is driving the equity market, which has positive wealth effects that support spending. He also says AI is reinforcing capex, meaning investment in AI infrastructure.

“Full time, every day, they're watching it... It's driving the equity market, having positive wealth effects. It's obviously reinforcing the CapEx.”at 28:56

Kevin Warsh · Federal Reserve

Oil prices have decoupled from market rates: rates rolled over even as geopolitically driven oil kept rising.

Warsh says oil prices and market-set interest rates had a strong, stable correlation this year until very recently. Oil has kept rising, largely due to geopolitical events, and crack spreads between crude and refined products remain elevated. Yet market interest rates have rolled over to the downside over the last several months. Oil futures have also risen over the past several weeks, which he says he cannot ignore. If oil were to fall, again probably on geopolitics, the Fed would need to assess the effects on its dual mandate and on financial market prices.

“There had been a stable correlation between oil prices as they've moved up this year generally and interest rates.”at 52:54