Wall Street is poring over Warsh's speech, which hints that there will be further interest rate hikes, but the magnitude will not be too large.

The Federal Reserve kept interest rates unchanged on Wednesday, but the wording of Fed Chair Wash was interpreted by the market as a clear signal that interest rates will still be raised later this year — though the magnitude is expected to be limited. This "unspoken" communication strategy led Wall Street analysts and traders to make their own interpretations, and the market's expectations for the policy path have gradually become clearer.

On Wednesday (October 28), the Federal Reserve voted 10-2 to keep the target range for the federal funds rate unchanged at 3.75% to 4%, and the market immediately turned its attention to the December meeting, expecting another rate hike in early 2027. Wash laid the groundwork with strong economic data at the press conference, putting the reality that inflation has been running above the 2% target for nearly six years at the core of policy discussions, hinting that the Fed's work is not yet done.

Many economists believe that Wash's remarks actually pave the way for a rate hike in December, while deliberately retaining policy flexibility for himself. Vincent Reinhart, Chief Economist at BNY Investments, summed it up as: "He is laying the groundwork for further tightening, but at the same time drawing a line in the sand — there is no need to tighten too much." Futures market pricing shows that investors currently expect the Fed to raise interest rates once each in December and March next year.

Market Interpretation: Hawkish Tone Less Aggressive Than Expected, But Rate Hike Path Basically Confirmed

For some traders, Wash's remarks were not sufficiently hawkish. The yield on the 2-year U.S. Treasury note, which is more sensitive to Fed policy, fell 4 basis points to 4.7%, while longer-dated yields edged higher.

Nevertheless, many economists still maintain the judgment that the Fed will raise interest rates twice more, arguing that this move is actually reversing the rate cuts implemented at the end of 2025 to stabilize the weak labor market.

"We still think they will act in December," said Oscar Muñoz, Chief U.S. Macro Strategist at TD Securities USA, "I think the threshold for them to stop raising rates is very high."

Brett Ryan, Senior U.S. Economist at Deutsche Bank, pointed out that Wash's refusal to characterize current financial conditions as "too tight", coupled with his optimistic judgment on economic growth, actually confirms the path of one more rate hike this year in the Fed's September forecast. "Without saying it explicitly, he sent a signal of further tightening," Ryan said.

Strong Economic Data Creates Room for Rate Hikes

Wash listed a series of economic highlights at the opening of the press conference: GDP in the first half of the year was revised up to 2.4%, the third-quarter growth tracker shows a rate above 3%, business investment recorded double-digit growth, and initial jobless claims are close to historical lows. He believes that this inherent resilience provides sufficient space for the Federal Open Market Committee (FOMC) to focus on the inflation target.

Wash also cited the September rate hike decision as evidence of the Fed's willingness to act — that was the first rate hike in three years, passed unanimously. He also emphasized that there is an "information-rich window" between now and the December meeting, when new growth and inflation data will be released, including relevant data due out on Thursday.

"It is our responsibility to bring inflation down," Wash said, "That is why the FOMC's discussions over the past few days have focused mainly on our price stability mandate."

Deliberate Ambiguity: Neither Stifling Growth Nor Declaring Conditions Too Tight

In this speech, Wash deliberately struck a balance between a hawkish stance and supporting growth. He made it clear that the Fed's goal is not to "put sand in the gears of the economy and put people out of work", and hinted that he hopes to curb inflation without impacting business investment and employment.

When asked whether the demand brought by AI infrastructure construction has pushed up inflation, Wash instead emphasized the potential improvement in labor productivity and technical efficiency, and said:

"Higher economic growth does not mean that growth itself is creating inflation and making our job harder."

On the issue of financial conditions, Wash acknowledged that credit conditions have tightened since the September rate hike, but refused to declare that market conditions are tight enough to suppress growth on their own. "Even as overall financial conditions have tightened, I am not willing to, nor can I, characterize them as overly tight," he said. This remark was interpreted by the market as meaning that the Fed still needs to complete the tightening task through further rate hikes.

Internal Divergence: Two Dissenting Votes, Hawks' Support for Pause Likely Due to Expected December Hike

This decision to keep interest rates unchanged was not without controversy. Fed Governor Lisa Cook and Cleveland Fed President Beth Hammack voted against it, preferring an immediate rate hike.

Notably, Dallas Fed President Lorie Logan and Minneapolis Fed President Neel Kashkari, who had previously repeatedly warned about high inflation, sided with the majority this time. Kathy Bostjancic, Chief Economist at Nationwide, believes:

The reason why they supported the pause is most likely because they expect the Fed to raise interest rates again in December.

This article is from the WeChat official account "Wall Street CN", written by Dong Jing, authorized for release by 36Kr.