US Fed decision: What Kevin Warsh’s next move could be as inflation stays above 3% and jobs weaken | 3 things to watch

The US Federal Reserve faces a critical debate over how to address an inflation problem that shows no immediate sign of going away, while high borrowing costs are putting pressure on the housing market and the labour market presents its own challenges.When the rate-setting Federal Open Market Committee (FOMC) announces its decision on Wednesday, markets overwhelmingly expect no change in benchmark interest rates following September’s quarter-percentage-point increase.Investors will be looking for clues about future policy moves, particularly from Chairman Kevin Warsh.Why is the Fed struggling to control inflation?Recent inflation data has offered little respite from price pressures that intensified earlier this year.

The consumer price index (CPI) showed an annual inflation rate of 3.7% in September, driven largely by soaring energy prices.Core CPI, which excludes volatile food and energy prices, stood at 2.6%, up 0.3 percentage point from August. This remains above the Fed’s 2% inflation target, with the latest reading heading in the wrong direction.At the same time, the housing market is struggling under the pressure of mortgage rates above 7%.

The labour market has settled into a low-fire, low-hire pattern, with layoffs around their lowest levels since the late 1960s, while people out of work struggle to find jobs.Why might the Fed pause rate hikes?A pause could give policymakers more time to assess the impact of September’s rate increase on the economy and financial conditions. However, signalling tighter policy could put further strain on the housing and labour markets.

Brett Ryan, senior US economist at Deutsche Bank, expects Warsh to signal that further tightening may be needed over time. The chairman “is likely to signal that recent inflation data reinforce expectations from the September meeting that further tightening will likely be needed over time,” Ryan wrote in a note to clients. “However, skipping October allows officials more time to assess trends in the data,” he added, as reported by CNBC

Warsh has also shown reluctance to provide forward guidance, seeking to move the central bank away from the practice of explicitly signalling where policy is heading. What to watch next 1. Kevin Warsh’s signals: Investors will look for clues about future rate moves, even as Warsh remains reluctant to indicate the direction of policy in advance. 2. Inflation data: Whether inflation continues to remain above the Fed’s 2% target will be crucial as policymakers assess the need for further tightening.

3. Housing and labour markets: The Fed must weigh the risks of tighter policy against pressure on housing and employment. Krishna Guha, head of economics and central bank strategy at Evercore ISI, pointed to the risks facing the Fed. “It ought to be possible for Warsh – who is alert to market risks even though he professes not to like mollycoddling investors – to show a calming steady hand,” Guha said in a Monday note.

“But there is material execution risk.”The Fed’s lack of detail on how it views the risks to its dual mandate of low inflation and full employment, as well as the pace of monetary tightening, poses substantial challenges.While inflation data has been hot, the unemployment rate has been fairly steady.