Traders almost unanimously bet that the Federal Reserve would not raise interest rates when it meets later this month. However, this judgment is partly based on assumptions about the Fed's communication style, which may no longer apply under the leadership of the new chairman Kevin Warsh. Warsh has left room for maneuver, and if he chooses to do so, he could still push for an interest rate hike.

It should be noted that on Friday morning, while attending an event at the International Monetary Fund in Bangkok, Warsh stated clearly that he was not implying any particular direction for decision-making. However, his remarks still reinforced the market's belief that the Federal Reserve will pause its interest rate hikes. As of Friday morning, the futures market was pricing in a 15% probability of a rate hike in October. This assessment continues a line of thinking shared by other Federal Reserve officials, including the chairman's traditional main assistants, who have all indicated that they could accept maintaining current interest rates.

Investors have good reasons to expect the Federal Reserve to remain inactive. However, based on inflation data, there are also reasons for Warsh to push for interest rate hikes at the Federal Open Market Committee meeting on October 28th. The market seems to have overlooked this possibility, based on its long-term experience with the Federal Reserve.

However, this chairman repeatedly refused to follow the convention of revealing plans to the market in advance before the meeting. This also raises one possibility: investors may be too complacent in their assessment of the probability of a rate hike in October.

This complacency is based on several factors. One of them is that the chairman's main assistants speak on his behalf, or at least they do not oppose him in public. This was indeed the case in the past, but it may not be the case anymore.

In recent weeks, Federal Reserve Vice Chairman Philip Jefferson and New York Fed Chair John Williams have both made statements indicating that they do not see an urgent need to raise interest rates. The market quickly re-priced accordingly, leaning towards no action in October.

Warsh, Jefferson, and Williams form an informal decision-making group within the Federal Reserve, known as the "troika." Even though Warsh does not agree with the practice of publicly expressing his views, he can still coordinate with this group. However, it is uncertain whether the traditional practice of the New York Fed Chair and the Federal Reserve Vice Chair making public statements will continue to be effective after a change in leadership.

Another assumption is that Warsh generally agrees with the views of the Federal Open Market Committee regarding the economy. Warsh said when discussing the economy since September in Bangkok: 'Overall, the world is largely in line with our expectations.'

This can be understood as follows: The recent relatively high readings of the Consumer Price Index (CPI) and Producer Price Index (PPI) do not negate the views expressed in the latest economic forecast summary ( SEP ) released by the Federal Reserve at the end of its September meeting. At that time, the median expectation of Federal Reserve officials was that there would be another interest rate hike in 2026, which means that the hikes could be paused in October and then resumed in December.

However, at the press conference in September, Warsh made a clear distinction from SEP. He said to a reporter, "That is not my prediction."

Warsh delivered a highly anticipated speech at Jackson Hole, Wyoming, at the end of August, where he elaborated in detail on his unique views on the economy. He believed that strong economic growth was more concerning than the job market regarding inflation. Subsequently, the distinctly hawkish stance of Warsh led to FOMC unanimously agreeing to raise interest rates in September. This hawkish position was largely based on what he considered to be a lax credit environment.

The Federal Reserve Bank of Chicago's National Financial Conditions Index has risen by about 0.05 points since Jackson Hole, but it remains negative, indicating that although financial conditions have tightened to some extent, they are still generally loose.

Does Warsh think that the market has already done the work for him? Was what he said on Thursday, "removing a dose of easing," sufficient? These questions can be speculated about, but the real answers will only be revealed at FOMC's press conference.

In addition, there are inflation figures. In September, the Consumer Price Index rose by 3.7% year-on-year, and the Producer Price Index rose by 6.3%. These new data suggest that the Fed's preferred next inflation measure – the Core Personal Consumption Expenditures Price Index – may reach 3.1% year-on-year. The overall PCE affected by energy prices will be even higher.

Warsh has always made it clear that such a level is a problem. After economists questioned whether he would tolerate inflation above 2%, he gave a clear answer at Jackson Hole: “There should be no misunderstanding,” said Warsh, that the Federal Reserve’s 2% PCE target “is a firm and fixed goal.”

Warsh is clearly still getting familiar with this job. It's very likely that he is realizing that the Chairman of the Federal Reserve cannot operate alone and must rely on staff and FOMC other members to assist in completing the work. Similarly, he may also find that the market does not send clear signals independently of the Federal Reserve.

Raising interest rates against strong market expectations often leads to volatility. In the past, it was this factor that prompted officials such as Jefferson and Williams to intervene. If an unexpected decision is made after they are perceived to have already guided the market, it could undermine their credibility and make the Federal Reserve's decisions even more difficult to predict.

However, it is still unclear how Warsh will handle these issues. Before the October meeting, he may decide to put pressure on the hesitant members due to strong demand for artificial intelligence expenditures and relatively high inflation data. It is also possible that after evaluating the committee's opinions, he will shift towards a more moderate stance.

Warsh may still cause unexpected issues, and it is risky to assume that this will not be the case.