The Federal Reserve is expected to keep interest rates on hold on Wednesday, six days before the US midterm elections, but with inflation at 3.7% and oil prices still elevated, investors see another hike in December as likely and will scour Chair Kevin Warsh's words for clues.
When the Federal Reserve announces its decision at 19:00 CET on Wednesday, it is widely expected to leave its benchmark rate unchanged at 3.75% to 4%, less than a week before Americans vote in the midterms.
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However, with inflation at 3.7%, energy prices at the highs and another hike in December seen as likely, investors will be watching Fed Chair Kevin Warsh closely for clues about what comes next.
Markets put the chance of a hold at over 90%, but see a 73% chance of a quarter-point hike at the Fed's 8-9 December meeting, according to CME Group's FedWatch tool, which tracks interest rate futures.
That would follow September's increase, the Fed's first in three years. Since then, several senior officials have played down the urgency of moving again.
Vice Chair Philip Jefferson pointed in a speech to the jump in longer-term borrowing costs, adding that "my colleagues and I will need to come to our own judgment, which may take more time".
New York Fed President John Williams reiterated the same sentiment in a speech at the University at Buffalo stating that "there is no need for urgency".
Politics looms too.
"The Fed doesn’t want to poke the White House in the eye six days before an election,” said Joseph LaVorgna, chief economist at Japanese bank SMBC's US arm and a former Trump administration official.
Not everyone may go along.
Cleveland Fed President Beth Hammack and Dallas Fed President Lorie Logan, who both say rates are not yet high enough to cool inflation, could vote for a hike, and as many as three officials could dissent.
Inflation runs hot as growth holds up
The case for tighter policy remains. US consumer prices rose 3.7% in September from a year earlier, up from 3.4% in August, while core inflation, which strips out food and energy, rose to 2.6%. Wholesale prices jumped 6.3%.
Chicago Fed President Austan Goolsbee stated the reading was "discouraging", saying underlying inflation at today's level was "not acceptable".
Petrol, which has topped $4 a gallon for the past three months, accounted for over half of September's price increase, according to the US Labor Department. Diesel hit a record $6.53 a gallon in late September, raising the cost of shipping almost everything.
Brent crude, the global oil benchmark, fell over 6% on Monday, from about $117.4 a barrel, its highest close since 19 March, as diplomacy over the Iran war seemingly gathered pace.
At the time of writing on Tuesday, it traded at roughly $110.8 a barrel, still far above the $72 it fetched before the Iran war began in late February.
Borrowing costs are biting too.
The average 30-year US mortgage rate hit 7.4% in early October, a three-year peak, before easing to 7.32% last week, against just under 6.2% a year ago. Research firm Oxford Economics estimates this year’s rise has priced 5 million more American households out of buying a home.
Expectations of further hikes have also kept the US dollar close to an 18-month high against major currencies.
The economy, meanwhile, is bending rather than breaking.
Employers added just 29,000 jobs in September and unemployment rose to 4.2%, yet the US economy grew at an annualised 2.2% in the second quarter, and the Atlanta Fed’s GDPNow tracker points to 3.5% for the third.
The next test comes straight after the decision.
On Thursday at 13:30 CET, the US publishes its first estimate of third-quarter growth and September data for the Fed's preferred inflation gauge, the personal consumption expenditures (PCE) price index.
"Fed officials still appear broadly intent on tightening policy at a measured pace," Thomas Ryan, senior North America economist at Capital Economics, wrote in a note.
All eyes on Warsh
Warsh, who will speak to reporters at 19:30 CET, has offered few hints.
Speaking in Bangkok at the International Monetary Fund and World Bank annual meetings this month, he said the world had "broadly conformed to our expectations" since September.
"I don’t prejudge meetings," Warsh said while stressing that "at the Federal Reserve, we made very clear that we would deliver price stability."
He has long expressed opposition to forward guidance, the practice of signalling future moves to the markets, and has avoided it.
Aditya Bhave, head of US economics research at Bank of America, said a surprise hike could "end forward guidance by showing markets that they can't listen to the guidance anymore," though most economists doubt it.
The Fed Chair's independence is also under scrutiny.
Warsh defied US President Donald Trump's calls for lower rates in September, but Trump later said he had told Warsh he "might as well" vote for a hike, and has since stepped up his push to remove Fed Governor Lisa Cook.
Trump created a three-person committee to recommend whether he has cause to fire Cook over mortgage fraud allegations she denies. Cook is expected to appear before the committee next week.
As for Warsh, if his speech focuses on the fact that inflation must return to the Fed's 2% target faster, investors will likely read it as the confirmation for a December hike.
