LIVE MARKETS-Fed's informal guidance may be limiting its flexibility

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FED'S INFORMAL GUIDANCE MAY BE LIMITING ITS FLEXIBILITY

The Federal Reserve may have moved away from formal forward guidance, but officials' frequent public comments have created something close to a substitute, and one that could constrain policymakers' room to maneuver.

Fed Chairman Kevin Warsh has argued that forward guidance limits policymakers' flexibility. But other Fed policymakers “are still free to offer their views, and have done so with gusto,” FHN Financial chief economist Chris Low wrote in a note.

“The upsurge in individual guidance, with participants offering their likely voting paths, gets back to the original reason the Powell Fed considered cutting back guidance and the Warsh Fed followed through,” Low said.

And that could leave Warsh with a dilemma on Wednesday.

September inflation came in hotter than expected, and energy costs remain high. But fed funds futures traders are pricing in only 7% odds of an interest rate hike on Wednesday, according to data from LSEG.

“The Fed could hike now, and the impact would likely be more effective given no hike is expected until December,” Low said. “This might be a perfect opportunity for Warsh to establish one of the reasons he does not like forward guidance. It limits the Fed’s flexibility.”

(Karen Brettell)

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