Waller downplays forward guidance on interest rates; speeches by two Federal Reserve officials still sway the market; expectations for a rate hike in October cool significantly

According to English Planet Daily, despite Federal Reserve Chairman Powell making it clear that he does not wish to signal a definite interest rate path to the market through forward guidance, the speeches given by two senior Fed officials this week have significantly influenced investor expectations. Fed Vice Chair Jefferson and New York Fed President Williams both stated that the Fed has time to further assess economic conditions and does not need to rush into another rate hike, prompting the market to sharply lower its bets on an October rate hike.

Based on federal funds futures pricing, before Williams’ speech on Tuesday, traders expected about a 70% probability of the Fed raising rates at the October 27-28 meeting. By the end of Jefferson’s speech on Thursday, that probability had fallen to about 25%. The unexpectedly weak inflation data released during this period also further diminished the market’s expectations for a near-term rate hike.

Nevertheless, Fed officials have not ruled out the possibility of further tightening monetary policy. Inflation remains above target, and the U.S. Consumer Price Index (CPI) data scheduled for release on October 14 may serve as a crucial reference for subsequent policy direction.

Two Senior Fed Officials Make Consecutive Statements as the Market Rapidly Lowers October Rate Hike Bets

At its September 16 meeting, the Fed unanimously approved a 25-basis-point rate hike—marking the central bank’s first policy rate increase since 2023. At the time, the U.S. economy showed signs of accelerating growth while inflation remained persistently high, prompting policymakers to resume tightening measures.

In its subsequent economic forecasts, Fed officials signaled the possibility of an additional rate hike this year. This policy backdrop fueled rapid market bets on another hike in October, and U.S. Treasury yields surged, further pushing up borrowing costs across the economy.

However, Williams and Jefferson’s speeches—delivered just two days apart—have changed market perceptions about the timing of the next rate hike. Both emphasized that the Fed can wait for more economic data before deciding whether further rate increases are necessary. Given that the New York Fed President holds a permanent vote on the Federal Open Market Committee (FOMC) and traditionally serves as its vice chair, Williams’ policy statements have always attracted intense market attention.

Traditionally, the Fed Chair, Vice Chair, and New York Fed President are seen as the core trio in monetary policy decision-making. During some previous chairmen’s tenures, investors commonly believed that public remarks by the Vice Chair or New York Fed President might reflect the collective position of this core group. However, there is currently no evidence indicating that Jefferson and Williams coordinated their remarks in advance or that their statements were unified by Powell.

Nonetheless, many Wall Street institutions believe the two officials’ remarks convey a relatively consistent policy message. Goldman Sachs economists stated that Jefferson and Williams’ statements further reinforce their assessment that the Fed is unlikely to raise rates in October. Evercore ISI’s Head of Economic Research, Krishna Guha, and colleagues noted in Thursday’s report that the combined message from these two officials carries considerable weight.

J.P. Morgan Chief U.S. Economist Michael Feroli believes these two speeches were intended to adjust market expectations. He pointed out that the core message delivered is that the Fed does not need to raise rates at every consecutive meeting and can lengthen the interval between policy adjustments to better evaluate economic data and the impacts of prior hikes.

Powell Downplays Forward Guidance as the Fed Shifts to Greater Dependency on Data

It is noteworthy that the clear influence of this week’s Fed officials’ remarks on market expectations coincides with Powell’s efforts to change how the central bank communicates with investors. Unlike past practices using forward guidance to steer rate expectations, Powell prefers to avoid signaling future policy adjustments prematurely.

He does not participate in the Fed’s quarterly rate forecasts and takes care to avoid revealing upcoming rate actions in public remarks, encouraging investors to judge policy outlooks based on economic data.

This communication style has gained support among some economists. Critics of forward guidance argue that, while clear policy promises help stabilize expectations in special periods like financial crises, over-reliance on forward guidance in environments with rapidly shifting economic data—where decision-makers cannot accurately forecast future trends—can constrain policy flexibility.

The complexity of this week’s economic data demonstrates these challenges. On one hand, both inflation and employment data were weaker than expected, reducing the urgency for the Fed to raise rates immediately; on the other, U.S. consumer spending remains resilient, and economic growth appears to be accelerating. This means the Fed must guard against persistent inflation while also watching for potential softness in the labor market.

Ellen Meade, a Duke University economics professor and former Fed adviser, believes Jefferson and Williams’ remarks do not exactly fit the traditional definition of forward guidance. She noted the subtle but important distinction between promising a specific rate move in advance and expressing a need for more time and data to make a prudent decision.

William English, professor at Yale School of Management and former Fed division director, similarly thinks the two officials’ remarks are unlikely to have been coordinated and are more probably individual expressions of their assessments of economic conditions and monetary policy.

Multiple Fed Officials Emphasize Patience — Internal Divergence on Rate Hikes Persists

Besides Jefferson and Williams, other Fed officials’ comments this week indicate that policymakers now lean toward awaiting further economic data before taking new actions.

At a conference in Asheville, North Carolina, Richmond Fed President Barkin, Boston Fed President Collins, and Kansas City Fed President Schmid all refrained from clarifying their positions on policy for the year’s final two meetings.

When asked about future rate paths, all three stressed the need to watch upcoming data. Barkin stated that it’s best to observe how economic conditions evolve first. Subsequently, Fed Governor Bowman, who oversees bank supervision, also said there is currently no urgent need for another rate adjustment.

However, not all Fed officials share the same attitude toward further rate hikes. Dallas Fed President Logan, who has been an active advocate for rate increases this year, said this week that multiple rate hikes may still be needed to bring inflation back to the Fed’s 2% target. She also observed that rising term premium in the bond market could exert its own macroeconomic restraining effects.

Wall Street Reassesses Rate Path as October 14 Inflation Data Becomes Key

Following this week’s series of Fed officials’ remarks, the market’s outlook for monetary policy over the remainder of the year has visibly shifted.

Clocktower Group Chief Macro Strategist Eric Wallerstein, a former adviser to ex-Fed Governor Milan, believes Jefferson and Williams’ remarks aim to correct market expectations about the pace of upcoming rate hikes. He noted that whenever there’s a disconnect between market pricing and officials’ understanding of economic or policy realities, it is not unusual for the Fed to use public communication to influence investor expectations.

Still, the wait-and-see signals from officials do not mean the current rate hike cycle has ended. On one hand, the Fed’s September policy forecasts still show policymakers expect one more hike this year; on the other, the recent surge in U.S. Treasury yields means officials must evaluate the impact of tightening financial conditions on the economy.

Meanwhile, the upcoming October 14 Consumer Price Index will provide fresh inflation clues to the Fed. If price pressures persist, further rate hikes may remain a policy option; if inflation cools, policymakers may gain more time to observe economic changes.

Notably, the U.S. September jobs report released Friday indicated that nonfarm payrolls increased by just 29,000, further reinforcing expectations for the Fed to pause rate hikes. According to market pricing released that day, the probability of an October hike dropped further to about 14%, below the roughly 25% level at the close of Thursday’s speeches.

Overall, the core signal from senior Fed leaders this week was not the end of rate hikes, but that there’s no need to act urgently at two consecutive meetings. While Powell is downplaying traditional forward guidance, Jefferson and Williams’ remarks show that policy statements from Fed officials can still significantly impact market expectations.

With weakening employment data and inflation pressures not yet fully abated, the timing of the Fed’s next rate adjustment will continue to depend on how economic and inflation trends unfold in data over the coming weeks.