Wall Street interprets Warsh's speech: Signals further rate hikes, but magnitude may be limited

October 29: The Federal Reserve on October 28 voted 10 to 2 to keep the target range for the federal funds rate unchanged at 3.75% to 4%. Fed Governor Lisa Cook and Cleveland Fed President Beth Hammack dissented, advocating an immediate rate hike. Multiple institutions interpreted Chair Warsh's remarks as indicating further rate hikes remain possible, though the magnitude of subsequent increases may be limited.

At a press conference, Warsh cited economic resilience: first-half GDP growth was revised up to 2.4%, third-quarter growth tracking shows above 3%, business investment achieved double-digit growth, and initial jobless claims are near historic lows. He believes this provides the Fed with room to focus on its inflation target. Regarding financial conditions, Warsh acknowledged that credit conditions have tightened somewhat since the September rate hike, but was unwilling to characterize overall financial conditions as "restrictive."

Oscar Muñoz, Chief US Macro Strategist at TD Securities, said he still expects the Fed to act in December and believes the bar for not raising rates again is high. Brett Ryan, Senior US Economist at Deutsche Bank, noted that Warsh's optimistic assessment of economic growth and his refusal to view financial conditions as restrictive confirm the Fed's September projection of one more rate hike this year. He believes Warsh is signaling further tightening without saying so explicitly.

However, Warsh also emphasized that stronger economic growth does not necessarily mean growth is generating inflation, nor does it necessarily require higher rates; the Fed's goal is not to impede the economy or cause people to lose their jobs. Vincent Reinhart, Chief Economist at BNY Investments, summarized it as: Warsh is laying the groundwork for further tightening, but also drawing boundaries—namely, that not too much tightening is needed.

The voting structure also drew attention. Dallas Fed President Lorie Logan and Minneapolis Fed President Neel Kashkari, who had previously consistently warned of high inflation risks, supported keeping rates unchanged this time. Kathy Bostjancic, Chief Economist at Nationwide, believes the two supported holding off likely because they expect the Fed to raise rates again in December. This is her judgment of their voting motivations, not a policy commitment already made by the two officials.

Market reaction showed that some traders believe the remarks were less hawkish than expected. The two-year Treasury yield fell 4 basis points to 4.7%, while long-end yields edged higher. Reports said futures markets currently expect one rate hike each in December and next March. Warsh emphasized that there remains an "information-rich window" between now and the December meeting, and new growth and inflation data will inform the decision.