Warsh Fed Faces October Rate Hike Test After Hot Inflation Data

Warsh's no-guidance approach meets a hot inflation print

Kevin Warsh has spent his early months as Federal Reserve chair refusing to say where interest rates are going next. Hot inflation data has made that position harder to hold. The first test came in September, and it ended with a rate hike. The second comes on Wednesday, Oct. 14, when the September consumer price index is released two weeks before the Fed's Oct. 27-28 meeting.

The pressure started with the August CPI report, released Sept. 11. Core prices, which exclude food and energy, rose 0.3% for the month, more than forecasters expected. Headline prices rose 0.4%, bringing annual inflation to 3.4%.1 The report changed expectations within days. A Reuters poll on Sept. 9 had found most economists expecting the Fed to hold rates steady. After the CPI release, the consensus flipped to a quarter-point increase.7

My reading of the coverage is that the Fed raised rates in September mostly because Warsh had already committed himself in public, not because of one data point. The real question now is whether that commitment carries into October.

How Warsh committed himself

Warsh laid out his standard at the Kansas City Fed's Jackson Hole symposium in late August. He said inflation was running above the 2% target and that the Fed's main focus should be prices. He also said better-than-expected summer readings had not convinced him that underlying trends had improved.1 His test was that the Fed must be confident inflation is falling toward its goal "clearly and at sufficient speed," and that otherwise the Fed has work to do.7

That language left him little room. CNBC's analysis before the meeting argued that holding rates after so many inflation warnings would make his future warnings less believable. It would also revive speculation about whether Warsh, President Trump, Treasury Secretary Scott Bessent or Governor Christopher Waller was really steering policy.1 Wall Street economists agreed. JPMorgan's Michael Feroli said the chair's repeated warnings would put the Fed's credibility at risk without action to back them up. Scotiabank's Derek Holt thought a hike was a mistake but said Warsh had "boxed himself in" by deferring so heavily to markets.7

The Fed's internal debate had been split. In early September, Waller urged colleagues to "give disinflation a chance." New York Fed President John Williams also preferred to wait. Meanwhile, Cleveland's Beth Hammack, Dallas's Lorie Logan and Minneapolis's Neel Kashkari had dissented in July because they wanted a hike.7

The September decision

On Sept. 16 the Federal Open Market Committee voted 12-0 to raise its target range by a quarter point, to 3.75%-4%. It was the Fed's first increase since July 2023.2 Warsh's main line at the press conference was that "the plain fact is that inflation is too high and has been for too long."3 He linked the decision to the economy picking up speed since July. He also said renewed fighting between the U.S. and Iran, which pushed up gasoline prices, had persuaded officials to support hikes.4

Warsh still did not say what would come next. He would not say whether the hike was the first of several or a single move. He described it as removing "a dose of accommodation."2 He also argued that the August CPI report had not played an outsized role and that he was focused on trends.2

The committee's projections said more than he did. Sixteen of the 18 officials who submitted forecasts expected at least one more hike this year, and four expected two.4 The median projection puts the rate around 4.1% at year-end, one more quarter-point move.3 Officials raised their year-end inflation forecasts to 3.7% for headline PCE and 3.4% for core.2

Markets took the decision as a gain in credibility. Long-term inflation expectations fell even as Treasury yields rose, which suggests investors were reacting to stronger growth and higher expected rates rather than worrying that inflation would get out of hand.2 Some investors were still uneasy. Schwab's Collin Martin said Warsh had given bond markets more clarity. The Economic Times reported, though, that his reluctance to offer forward guidance was still unsettling Wall Street.10

Since September, the case for an October hike has faded

The data since the meeting have mostly argued against moving quickly. The September jobs report, released Oct. 2, showed only 29,000 jobs added and unemployment at 4.2%. According to CNBC figures, the futures-implied odds of an October hike fell to about 17% from 36% the week before.13 August PCE inflation, released Sept. 30, came in at 3.4% headline and 3.0% core, below Fed staff estimates in the minutes.15

The minutes of the September meeting, released Oct. 7, said most participants thought another increase "would likely be appropriate by year end". They did not say it had to come in October.15 Officials' recent comments point the same way. Logan has said the target range needs to rise another 50 basis points or more. Williams has said one more increase "may be appropriate late this year." Vice Chair Philip Jefferson has said a decision may take more time.15 Waller said on Oct. 8 that more hikes are probably needed but need not come at back-to-back meetings. Vice Chair for Supervision Michelle Bowman has signaled she would prefer no further hikes in 2026.11

The sources broadly agree that October hike odds sit around one in five, though the exact figures vary. Investopedia put them near 20% as of Friday, Oct. 9.8 Hokanews, citing Coin Bureau and CME FedWatch, put them at about 19% on Oct. 9.18 An Admiral Markets tally showed 26% on Oct. 7 and roughly 70% in late September.12 The direction is clear: the market has moved from expecting back-to-back hikes to expecting a pause until December.

Headline versus core in Wednesday's report

Wednesday's report looks set to send mixed signals. Forecasts call for headline CPI to rise to about 3.6%-3.7% from 3.4%, mostly because of record September gasoline prices. Core inflation is expected to stay near 2.4%.11 The Cleveland Fed's nowcast projects a 0.53% monthly gain in headline prices and 0.20% in core.9 One outlier forecast puts core at 2.5%, which would point to slightly broader pressure.17

The Fed's own warnings make the headline-core gap hard to set aside. Without energy, core inflation near 2.4% is not far from target. But headline inflation is what households pay.13 One-year inflation expectations in the University of Michigan survey stand at 4.6%, and Waller has warned that persistent inflation could become embedded in expectations.11 Analysts have described the dividing lines this way:

• Core rises 0.2% or less for the month: an October hike becomes unlikely, and the debate moves to December.13
• Core rises 0.3% or more: the hike debate reopens, because energy can't explain it.12

Investopedia notes that a hotter-than-expected print could push officials toward a hike later this month.8

Why the calendar favors December

The meeting schedule is one reason to expect a pause. October's decision has only two new inflation reports before it: September CPI on Oct. 14 and producer prices on Oct. 15. September PCE arrives the day after the decision. By Dec. 9, the committee will have two more jobs reports, the October CPI and PPI, and two PCE releases.15 For a chair who says he looks past single data points, December offers far more evidence.

Politics is the other reason. The Nov. 3 midterm elections fall days after the October meeting. Goldman Sachs's Kay Haigh expects the Fed to skip October partly for that reason.3 Trump has demanded rates of 1% or lower and attacked the September hike.2 Some analysts suspect Warsh agreed not to raise rates before the election. CNBC notes there is no evidence for that and that Warsh has repeatedly insisted on his independence.1 The September hike, which went directly against White House wishes, weakens that theory.4

Bond yields keep rising

The bond market adds another complication. The 10-year Treasury yield rose from 5.00% on Sept. 15 to 5.31% on Oct. 5. Most of the increase came from real yields rather than inflation expectations.15 The 30-year yield reached 5.64% on Oct. 6.11 Warsh has pointed to stronger growth, heavy borrowing by technology companies to fund AI expansion, and geopolitics as the reasons.2 Long-term rates that are already this high do some of the Fed's tightening for it, which strengthens the case for waiting.

The bottom line

In my reading, the coverage points to a hold in October with a December hike still likely, unless core CPI comes in hot on Wednesday. A soft core number would let Warsh pause without looking like he has given up on inflation. The September projections and minutes have already told markets a second hike is coming, even though Warsh himself hasn't. A hot core number would put Warsh back where he was in early September, facing the question of whether his warnings will be backed by action. He answered it with a hike last time. A second test would come with an election days away and with markets watching for any sign that he has backed off.