U.S. Inflation Shock Ripples Through Markets; Warsh to Address Rate-Hike Outlook
An unexpectedly hot U.S. inflation reading has broken a record stretch of calm on Wall Street, shifting attention to Kevin Warsh, who speaks publicly before the Federal Reserve begins its pre-meeting blackout.
The S&P 500 fell 1.1% on Wednesday, ending 53 consecutive trading days without a single-session loss of 1% — the index's longest run of calm since January 2020. Weakness in large-cap technology stocks undercut the momentum behind the long rally. The benchmark has added roughly $13 trillion in market capitalization since the end of March, and Wednesday's pullback is beginning to stir fears that the advance faces bigger hurdles.
Warsh, a former Fed governor, once pledged not to steer markets with short-term monetary policy outlooks. The inflation surprise has raised the stakes. Markets will parse his fireside chat with IMF Managing Director Kristalina Georgieva in Bangkok, scheduled for Thursday evening Eastern time (11:30 Beijing time on the 16th). The Fed goes quiet on Saturday ahead of its Oct. 27-28 policy meeting, leaving his remarks an important channel for any signal on rates.
"Investors are waiting for Warsh to bless the Fed's future path of rate hikes tomorrow," said Bank of America U.S. rates strategist Meghan Swiber. Of the data, she said: "This was broad-based strength, and the Fed will find it harder to ignore."
The September CPI, released Wednesday, showed widespread gains in goods and services prices. Airfare, used cars and healthcare costs all rose on the month, energy prices surged, computer and software prices posted the largest annual increase on record, and toy prices climbed the most since 1988. The report landed a day after New York Fed President John Williams struck an upbeat note on inflation, helping pull Treasury yields lower.
Traders repriced quickly. Futures market data showed the odds of an October hike rising from about 20% before the release to as high as 55%, then easing back to around 40%. Most Fed watchers still expect a hold this month, with the next increase pushed to December.
Before the CPI report, several senior officials — Vice Chair Philip Jefferson, Governor Christopher Waller and Williams — had said the central bank need not rush into another hike. Having raised rates at the September meeting for the first time since 2023, policymakers wanted time to gauge the impact of their policy. Politics adds another wrinkle: U.S. midterm elections fall a week after the October meeting, one reason some observers expect the Fed to stand pat.
Analysts also caution against overreacting to any single data point. Mortgage rates keep climbing, keeping housing under pressure, and delaying the next hike to December would give the Fed more time to judge whether the latest price pressures are persistent. "Many categories are warm, but there is no clear evidence of acceleration," said Guy LeBas, chief fixed income strategist at Janney Montgomery Scott. He argued that more compelling data would be needed to bring many cautious FOMC members on board for a hike this month.
Core inflation topped forecasts for a second straight month. Joseph Brusuelas, chief economist at RSM US LLP, said dovish committee members looked as though they had "drunk a cold cup of coffee" upon seeing the September CPI. "The depth and breadth of the triple supply shock are clearly at work in the U.S. economy," he added.
Even so, the report has reshaped market positioning for the October meeting, turning a gathering once seen as unlikely to move into one with real policy uncertainty. With headline inflation running at 3.7% year over year, the risk that long-term inflation expectations keep drifting higher also bears watching.
Analyst Colby Smith said Powell will now face pressure to explain why the Fed is sticking with gradual rate hikes while price pressures build. Ed Harrison, macro strategist at Markets Live, noted that a hawkish reassessment of the Fed's outlook could push short-end yields higher and drive the curve into a bearish flattening.
