Warsh's Fed keeps interest rates at 3.75% to 4% and signals that hike may await more data

The Federal Reserve maintained the federal funds rate in the range of 3.75% to 4%, in a decision announced by the monetary policy committee (FOMC). In a press conference broadcast by The Wall Street Journal, Fed President Kevin Warsh stated that the economy is advancing at a strong pace, but that inflation remains high and that more information will help define the appropriate policy stance.

According to Warsh, GDP for the first half of the year was revised from 1.8% to 2.4%. The third quarter appears to have brought even faster progress, with household consumption likely above 3% and business investment growing close to double digits. He said that capital spending is a historically high share of GDP and that the movement, led by technology, is expanding to other categories.

In the job market, the Fed president stated that the unemployment rate is lower than a year ago and that job creation is above last year's pace. The four-week moving average of unemployment claims is at the lowest level in generations, he said.

Inflation above target for almost six years

Warsh acknowledged that Americans have continued to deal with inflation above the committee's target for about six years. He said that energy and related prices have risen again in recent weeks and that the Fed's role is to prevent relative price increases in some sectors from spreading throughout the economy and that inflation expectations remain anchored.

Asked by journalists why he did not raise interest rates at this meeting, since, according to the New York Times reporter, the majority of his colleagues seemed in favor of a rise in December, Warsh said that combating inflation is not a question of a fixed date or isolated data. He stated that the Fed doubled its bet on the 2% target and that, in September, it removed a dose of accommodation. He also said that there is no "soft" or implicit inflation target: the target is 2% measured by the PCE. He acknowledged that the Fed has not yet achieved price stability, but stated that it is working towards this.

The Fed chairman also said that financial conditions have tightened somewhat since September, but that he does not consider them to be tight. According to him, this indicates that the policy is working and that it is possible to make the economy more durable without "throwing sand in the gears" or causing unemployment.

Oil, artificial intelligence and the committee's agenda

Regarding oil, Warsh noted that prices rose mainly due to geopolitical events and that market interest rates fell, breaking a correlation that had been strong. He avoided hypotheses about the effect of a fall in oil prices on inflation. Regarding the boom in investments in artificial intelligence, he said he is skeptical about the idea that interest rates do not affect this sector and that the growth in capital expenditure is expanding, not being restricted to a few niches.

Warsh announced a change in the FOMC calendar starting next fall: eight meetings will be held per year, but in 2027 one of them will be dedicated exclusively to monetary policy strategy, without a vote on the rate or a statement. For 2028, he expects two strategy meetings and six interest rate setting meetings.

The Fed president said he does not believe in forward guidance outside of exceptional circumstances and that he does not intend to anticipate decisions. Regarding the Fed's balance sheet, he stated that the responsible task force should deliver recommendations to the committee probably at the beginning of the first quarter, with an unlikely material effect on the current situation. For investors, the central message is that the Fed intends to wait for new data before defining the next step, with inflation as a declared priority.

Automatically translated from Portuguese.