A Fed Hike Could Break the Market’s Fedementalism

Last week, Federal Reserve Chairman Kevin Warsh appeared at the International Monetary Fund’s annual meeting in Bangkok and reiterated his refusal to tell investors what the Fed plans to do with interest rates.

“I don’t prejudge meetings. I don’t believe in saying now what I might do at the meetings we have in the balance of this year,” Warsh said. “It’s a new chapter at the Fed, and we’re not in that business anymore.”

Wall Street’s response was to become even more convinced that it knew what the Fed was going to do. Before Warsh spoke, fed funds futures indicated around a 72 percent chance that the Fed would leave rates unchanged at its October meeting. Afterward, the probability of a hold climbed above 85 percent. As of Thursday evening, the probability of a hold is up to 95 percent, a record high expression of certainty a little less than a week before the Fed meeting.

In other words, Warsh told investors he wasn’t providing forward guidance, and investors decided this was guidance that the Fed would not raise rates.