Although Federal Reserve Chairman Warsh has made clear he does not want to signal a specific interest rate path to markets through forward guidance, the speeches delivered by two senior Fed officials this week still significantly shaped investor expectations.

Fed Vice Chairman Jefferson and New York Fed President Williams said in succession that the central bank has time to further assess the economic situation and need not rush into another rate hike, prompting markets to sharply reduce bets on an October increase.

According to federal funds futures pricing, before Williams spoke on Tuesday, traders estimated the probability of a rate hike at the October 27-28 meeting at about 70%. By the time Jefferson finished speaking on Thursday, that probability had dropped to about 25%.

Inflation data released during that period came in weaker than expected, further dampening market expectations for a near-term rate hike. However, Fed officials have not ruled out the possibility of further monetary tightening. Inflation remains above the policy target, and the U.S. Consumer Price Index (CPI) data scheduled for release on October 14 could serve as an important basis for determining the direction of future policy.

Two Senior Fed Officials Speak in Succession, Markets Quickly Cut October Rate Hike Bets

The Fed voted unanimously to raise rates by 25 basis points at its September 16 meeting, the central bank's first rate increase since 2023. At the time, overall U.S. economic growth was showing signs of acceleration while inflation remained persistently elevated, prompting policymakers to resume tightening measures.

In the economic projections released afterward, Fed officials signaled the possibility of one more rate hike this year. This policy backdrop drove markets to quickly bet on another increase in October, and U.S. Treasury yields surged, further pushing up borrowing costs for the U.S. economy.

However, the speeches by Williams and Jefferson, delivered just two days apart this week, changed the market's assessment of the timing of rate hikes. Both emphasized that the Fed can wait for more economic data before deciding whether further rate increases are needed.

Because the New York Fed president not only holds a permanent vote on the Federal Open Market Committee (FOMC) but also traditionally serves as its vice chairman, Williams' policy statements have always drawn intense market attention. Traditionally, the Fed chairman, vice chairman and New York Fed president are viewed as the core trio at the helm of monetary policy decisions.

During the tenures of some former chairs, investors generally believed that public remarks by the vice chairman or New York Fed president could reflect the shared stance of this core decision-making group. However, there is currently no evidence that Jefferson and Williams coordinated their remarks in advance, nor is there evidence that their speeches were arranged under Warsh's unified direction.

Nevertheless, several Wall Street institutions still believe the two officials' statements conveyed a relatively consistent policy message. Goldman Sachs economists said the speeches by Jefferson and Williams further reinforced their view that the Fed is unlikely to raise rates in October.

Krishna Guha, head of economic research at Evercore ISI, and colleagues noted in a Thursday report that the message jointly delivered by the two officials carries considerable weight. Michael Feroli, chief U.S. economist at JPMorgan, argued that the two speeches were intended to adjust market expectations.

He pointed out that the core message from both officials is that the Fed does not have to raise rates at every consecutive meeting, but can appropriately lengthen the intervals between policy adjustments to assess economic data and the impact of previous rate hikes.

Warsh Downplays Forward Guidance as Fed Shifts Toward Greater Reliance on Economic Data

It is worth noting that senior Fed officials' notable impact on market expectations this week comes at a time when Warsh is seeking to change how the central bank communicates with investors. Unlike the past practice of guiding market rate expectations through forward guidance, Warsh prefers to avoid hinting in advance at the direction of future policy adjustments.

He does not participate in the Fed's quarterly rate projections and tries to avoid revealing the next rate move in public speeches, instead encouraging investors to judge policy prospects on their own based on economic data. This communication approach has won support from some economists.

Critics of forward guidance argue that during special periods such as financial crises, explicit policy commitments help stabilize market expectations; but in an environment where economic data changes rapidly and policymakers find it difficult to accurately judge future trends, over-reliance on forward guidance may limit policy flexibility.

The economic data released this week illustrates this complexity. On one hand, both inflation and employment data came in weaker than expected, reducing the urgency for the Fed to raise rates again immediately; on the other hand, U.S. consumer spending remains resilient and economic growth is showing signs of acceleration.

This means the Fed needs to guard against persistently high inflation while also monitoring potential weakness in the job market. Ellen Meade, an economics professor at Duke University who long served as an adviser to the Fed's Board of Governors, believes the speeches by Jefferson and Williams may not constitute forward guidance in the traditional sense.

She noted that there is a subtle but important difference between committing in advance to a particular rate adjustment and saying more time is needed to gather data and make a prudent decision. William English, a professor at Yale School of Management and former head of a Fed division, likewise believes the two officials' speeches were not necessarily coordinated but more likely reflected their separate assessments of the economic situation and monetary policy.

Multiple Officials Stress Patience, but Divisions on Rate Hikes Remain Within the Fed

In addition to Jefferson and Williams, other Fed officials' remarks this week also indicate that the policy-making body currently prefers to wait for economic data to provide further guidance. At a conference held in Asheville, North Carolina, Richmond Fed President Barkin, Boston Fed President Collins and Kansas City Fed President Schmid all declined to clearly reveal their policy judgments for the year's final two meetings.

When asked about the future rate path, all three emphasized the need to watch upcoming data. Barkin said the economy should first be observed to see how it develops. Subsequently, Fed Governor Bowman, who oversees bank supervision, also said there is no urgent need to adjust rates again.

However, not all Fed officials share the same stance on further rate hikes. Dallas Fed President Logan, who has actively advocated for higher rates this year, said this week that multiple rate increases may still be needed to eventually bring inflation back to the Fed's 2% target.

But she also noted that term premiums in the bond market are rising, which could also have a restraining effect on the economy.

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

After senior Fed officials spoke in succession this week, the market's assessment of the monetary policy path for the remainder of the year has changed markedly. Eric Wallerstein, chief macro strategist at Clocktower Group and a former adviser to ex-Fed Governor Mishkin, believes the speeches by Jefferson and Williams were intended to correct market expectations about the pace of near-term rate hikes.

He said that when market pricing diverges from the economic and policy reality as officials understand it, it is not new for the Fed to influence investor expectations through public communication. However, the wait-and-see signals from officials do not mean this rate hike cycle is over.

On one hand, the Fed's September policy projections still show that policymakers expect one more rate hike may be needed this year; on the other hand, the recent significant rise in U.S. Treasury yields also requires officials to assess the impact of tighter financial conditions on the economy.

Meanwhile, the Consumer Price Index due for release on October 14 will provide the Fed with fresh inflation clues. If price pressures remain persistently high, further rate hikes could still remain a policy option; if inflation continues to cool, policymakers may gain more room to observe economic changes.

Notably, the U.S. September employment report released on Friday showed nonfarm payrolls increased by only 29,000, further reinforcing market expectations that the Fed will hold off on raising rates. According to market pricing published that day, the probability of an October rate hike had fallen further to about 14%, below the roughly 25% level when Thursday's speeches concluded.

Overall, the core signal from senior Fed officials this week is not the end of rate hikes, but that there is no need to rush into action at two consecutive meetings. Although Warsh is downplaying traditional forward guidance, the speeches by Jefferson and Williams show that Fed officials' policy statements can still significantly influence market expectations.

With employment data weakening and inflation pressures not yet fully subsiding, the timing of the Fed's next rate adjustment will still depend on the growth and inflation picture reflected in economic data over the coming weeks.