FOMC: Fed pauses, Warsh softens the path ahead by Emkay Global Financial Services Ltd
* As widely expected, the Fed kept rates unchanged (with a 10-2 vote split), but markets took the meeting dovishly despite some hawkish elements in the decision. Two members dissented in favor of another 25bp hike and the Fed upgraded its assessment of economic activity, but Warsh pushed back against the need to materially weaken demand to restore price stability, arguing that stronger productivity could allow robust growth without commensurate inflation pressures.
* If anything, the growth side of the Fed's reaction function has become less constraining. Warsh highlighted that 1H growth was revised up to 2.4% from 1.8%, while 3Q appears to have accelerated further, with consumer spending likely running above 3% and business investment growing at a double-digit pace. Labor-market conditions also remain healthy. Nevertheless, Warsh argued that the economy did not appear "too hot", and that stronger productivity may allow faster non-inflationary growth. Thus, the Fed would not need to "throw sand in the gears" by engineering weaker growth to bring down inflation.
* However, Warsh was unequivocal that inflation remains too high (above target for "close to six years"), and that the FOMC's discussion was focused mainly on the price-stability side of the mandate. He acknowledged that the September hike has begun tightening financial and credit conditions but was explicitly unwilling to call overall financial conditions "tight".
* As is fast becoming the norm, forward guidance was deliberately scarce. Warsh again rejected conventional forward guidance outside crisis conditions, reinforcing the July message that policy will be communicated less explicitly than under previous Fed regimes.
* Chair Warsh announced that the Fed will reduce the number of rate-setting meetings, to seven in 2027 and six in 2028. However, there will continue to be eight FOMC meetings, with the non-rate setting meetings focusing on broad monetary policy strategy.
* Market reaction: The US yield curve bull-steepened following the decision (2Y: down 6bps; 10Y down 2bps; 30Y up 2bps), as markets interpreted Warsh's press conference as less hawkish on the near-term policy path. S&P 500 was up ~0.3%, while the DXY dipped 0.2%. Market pricing for a hike in December was unchanged at 78%.
Global tightening reinforces RBI's case for measured hikes
* This reinforces the RBI's reaction function, making the case for measured hikes ahead. The combination of elevated US rates, high oil prices, and weak natural dollar inflows argues for a higher Indian risk premium, limiting the RBI's ability to look through global tightening even though domestic policy remains primarily driven by inflation. The October MPC minutes reinforce this: resilient growth gives the RBI room to respond, but members favor measured rather than aggressive tightening, with disagreement principally over how long the cycle ultimately needs to run. We therefore retain our call for 75bp of cumulative tightening in this cycle, implying another 25bp each in Dec-26 and Feb-27.
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