Kevin Warsh's Federal Reserve held rates steady at its October meeting, as widely expected, and markets reacted mildly. The Financial Times' Robert Armstrong argues the decision raises three questions worth debating.
The first is whether the hold was adequately explained. Inflation has not improved since the last meeting, and economic growth has, if anything, picked up pace, with the Federal Open Market Committee moving its description from "solid" to "strong." Warsh's answer centred on strategy, namely that gradualism is needed to avoid sacrificing employment unnecessarily. That is a sensible approach, but there is only so much gradualism a central bank can justify when inflation has been above target for years. If broad inflation indicators do not improve by December, strategy talk will not be enough.
The second question is whether Fed policy has taken air out of the AI bubble. Warsh thinks it has, pointing to wider credit spreads and more discriminating investors. Armstrong is sceptical. Over recent weeks, he has not heard a single analyst or trader link tech's recent wobbles to the Fed's September rate increase. Higher rates across the yield curve matter, but a recent tweak at the extreme short end does not.
The third issue is whether reducing the number of live Fed meetings is wise. Warsh announced that one of the eight meetings next year will be a "strategic" session without normal policy decisions, rising to two in 2028. Critics argue that fewer live meetings would limit timely incorporation of new information, a concern Armstrong's colleague Daire Mac Fadden raised in Unhedged last week.
The Fed's patience may be tested sooner than Warsh would like.
Source: Financial Times Markets · Summarized by HeadlinesBriefing