Fed Holds Rates as Warsh Weighs Inflation, AI and December Hike Odds 10/28/26

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0:50Download the latest episode and subscribe at schwab.com slash marketupdatepodcast, or find Schwab Market Update wherever you get your podcasts. And that's, again, why people want an explanation. And let's get to Steve Leesman now for that decision on rates. Steve. Federal Reserve leaving interest rates unchanged at 375 to 4 percent in that range in a 10 to 2 vote. The Fed saying it seeks, quote, the accumulation of more information to figure out where to set policy and wants to, quote, ensure a timely return of inflation to the 2 percent target. I'm going to read this full new sentence that appears in the statement now.

1:27It says the accumulation of more information will help the committee determine the policy stance appropriate to ensure a timely return of inflation to the committee's 2 % goal. There were two dissenters, Beth Hammock from Cleveland and Lisa Cook, the Fed governor. She's the first governor to dissent since Stephen Myron in April of this year. She joined the board in April of 2022. This is her first dissent. It's Hammock's second descent at least this year. On the economy, they repeated a lot of the statements from the last statement. Inflation remains elevated, they said. Uncertainty is elevated owing to geopolitical developments.

2:05Domestic spending is resilient. Job gains have kept pace with the workforce. Unemployment, little change. One small change, they said the economy, economic activity is expanding at a strong pace, not a solid pace. So it sounded like a bit of an upgrade of the economy there. Kelly, Brian? A slightly more, would you say, Steve, I'm only using this language because it matters to the markets, dovish than expected. There were fewer descents than we might have otherwise had. Two is fewer than three or four, which some were pondering. Yeah, I mean, two was right in the middle of our Fed survey expectation, I'll tell you.

2:44We had 10 of the, half of the people who expected a descent expected two descents. So it's more or less, It's a little unusual not to have Lori Logan in there from Dallas. It could have been, I guess, worse from that standpoint or more hawkish from that standpoint to have three dissents in there. So, yes, the difficulty of the conversation, I think, Kelly, is going to be sort of dissecting what I would consider this tortured English sentence in the new statement. The accumulation of more information will help the committee determine the policy stance appropriate to ensure a timely return. I don't know if that's dovish or hawkish or neutral or not telling us anything about the future, but it's not the English sentence that I would have written.

3:24OK, well, we don't know. But luckily, we have people here that do know. And I want to give you just a quick market check. We're not seeing a big move in the markets, although I will say markets are not turning down on this. So kind of where we were, we're analyzing this on the fly, David Kelly. But that's why we invited you down to D.C., because you're smart enough to know what that means. Well, information is just another word for midterms. No, but that's exactly the point. They didn't want to say, you know, they're clearly waiting for more data, but they didn't want to say, but it's really what's policy going to be looking like in two weeks' time?

3:56You're saying the only data is the vote count, effectively. Well, I think they want, no, I think there's a lot that could change. And we have to get past the midterms, see if they're contested. There are a lot of things that could happen. And it's perfectly, monetary policy is in a reasonably good place. It's reasonably close to where it should be anyway. So why move now when you wait till December when you've got that much more information? I think that's that's really where they are. And they didn't want to put the word midterm in the statement. So they put in the word in Francis Donald. I know you're a wordsmith.

4:26How do you track that new statement in the statement? David Kelly and his comment about midterms. So I agree. That's probably the bulk of the new information we need. But there's other forms of information we might have more clarity on in the next two months. One of which, of course, is how sustainable energy prices remain at these elevated levels. That will be important to the Fed. And then also AI CapEx. How sustainable is that? There's some wobbles there. We might have some more information. But actually, if we're playing poets here, where I'm going to spend my afternoon thinking about is what is the difference between the word solid and strong?

5:02I got to get my thesaurus out because that could be an important clue. The word wouldn't have been changed unless it was deliberately changed. And so I got to get to the bottom of why. Which one is a better word? I think strong would be better than solid, Jeff. Go ahead, David. What do you think? We're getting a GDP report tomorrow, and that could be between 3 % and 4%. And maybe they've had a preview look at that. That's why I'm going to say strong. You know, overall, this was the non-event we expected with a slight plot twist of Governor Cook being the dissenter. And boy, is that fascinating on a more human level.

5:36But outside that, you know, I think the need, the info, you know, interesting. It is the election, but I do think Francis is right. There's other data points around AI, CapEx, the evolution of AI and this funding pressure that we talked about in the last segment. You know, I think the Fed is watching all that closely. But I think also, let's be clear, there is no evidence at all that wages are picking up here despite a tight labor market. There is also no real evidence that people are building in long term inflation expectations. You know, we've still got 235 is the implied inflation rate over the next 10 years, according to the tips.

6:08And that's barely budged. I mean, that's stayed right at 235. So they can say, look, so far, inflation expectations look not moving. So we're close to 4%. We're really not that bad a place. We can wait and see. All right, let's get now to Chicago. We're going to get reaction in the bond market. Joining us now is Chim Carson. He is founder and CIO of Kai Wealth. Chim, how do you read this? honestly what changed in jackson hole to make uh warsh more hawkish right uh nothing and right now nothing has changed to make him more dovish why have we taken this out nothing has changed and i'm willing to bet that the coming quarter that they're going to price in for december still also will not happen this in my opinion is kabuki theater at the end of the day they are trying to gain credibility, keep the Fed independent for now, ultimately, in terms of what they're saying.

6:58But ultimately, the only way to respond to what's important, which is the long end of the curve, is through more dovishness from the Fed, which will be coming in the months and quarters to come. I believe that is the next move. This is a matter of credibility. This is a matter of trying to state that they are being thoughtful of inflation. But at the end of the day, nothing has changed going into Jackson Hole and nothing has changed coming out. It's interesting, Chum, you think they're not going to hike again, because if you if there are people like you in the market, then they and they want we should watch how the Kelsey odds have changed.

7:31I think we're still expecting a December hike. And I don't know that maybe the Fed will will hear what you're saying and say, well, we got to convince him. They were they were expecting a hike right here, weren't they? And they didn't get one. Right. Right. And so I believe a lot of this commentary. Yeah, exactly. And so I believe a lot of this commentary that you're hearing is really to signal the markets that they're independent, that they're thinking about inflation. But ultimately, they don't want to raise here. They have a problem at the long end of the curve at the end of the day. At the end of the day, as you guys have mentioned, they're getting crowded out by all of the debt taken out by hyperscalers.

8:06They're getting this all this refinancing coming from all of the the 2021 debt that was taken out that had five to seven years duration. Obviously, we have the Strait of Hormuz issue, which is not resolving itself. All of these things are going one way. You have a structural problem along the other curve. We heard right earlier that this is we're having coming treasury crisis. Hank Paulson told us that in April and that we need to prepare a facility to respond to that. OK, they are going to have a facility to respond to that. That is what is coming. But in the meantime, they need to appear independent and they need to be mindful of inflation in the meantime.

8:42But the long end of the curve is ultimately the problem, not any of this kabuki theater, none of this what's happening in 25 basis points in December or not. Well, Iran and Homo's may ramp up, which could send oil prices back up. But then I wonder, do they raise rates in an intermeeting? I don't know how you bring down oil prices that are caused by a re-escalation of war. We'll get to that in a second. But Steve Leishman, now let's go back to you. You've had a little more time to parse about things, to think about things, to learn about things. What things? Well, you know, I'm interested in what David Kelly said.

9:12I don't think he meant it this way, but let's just be clear. I want to redirect on that point. The election is not a data point the Fed is going to care about. It may be a data point that they want to wait until it's done and logged in. But whichever way the election goes, I don't think it's going to be determinative in any way of what the Fed does on the other side of that. I don't think David Kelly was implying that. But I just want to be clear that the election is not a data point the Fed is going to care about in terms of making its decision. it may have had something to do with the timing of the decision.

9:43And that's one of the things that I think Kevin Warsh is going to have to answer. As I said at the top of the show, he goes into this meeting or he held this meeting the day before we know that PCE is going to be hotter, hotter than it was before it hiked last time. So we'll see what kind of explaining that he feels he wants to do to explain why the hold in terms of accumulating more information. We know that information is going to be higher inflation in the months ahead. But I think the election, first of all, traditionally, they don't like to move rates just before election. In fact, that's why in a presidential election, they deliberately timed that meeting a little after the election rather than before.

10:20So they don't want to move rates before the election because they don't want to be seen as political. But also, I would push back on you a little bit, Steve. I think that the look, if you get divided government, then A, you may see lower tariff rates next year because Congress will be able to push back harder on the president on that. B, you may see less funding for any further conflict in the Middle East. You could also see no further fiscal stimulus. You know, if you get a straight Republican government, which doesn't look that likely, but it could happen, then you could get much more fiscal stimulus.

10:51You get these$5 ,000 checks. So I do think the Fed won't want to say what it thinks about any of these policies, but it would be foolish to say that the policy agenda for next year is not going to be affected by these midterms, it is going to be affected. And what happens on fiscal policy will affect the economy that the Fed is looking at, just as it's doing right now. I mean, right now, it's about tariffs. It's about Iran. It's about things like immigration. All those could be impacted by the election. Let's bring in another voice sitting right next to you now. Matt Peterson is CNBC's senior economics writer.

11:24Matt, jump in here. What do you see when you look at the decision and the market reaction and where we go from here? The most surprising thing about this decision is how conventional Kevin Warsh has turned out to be, right? He went out there and let the rest of the Fed speak for him in a way that wasn't clear that he was going to do, right? We had Williams and Jefferson come out and guide the markets, two people in his troika that he didn't have any hand in selecting, decided to let them speak for them. He came out and gave this speech in Bangkok, which he said, you know, the economy has proceeding as we expected, we, the royal we in the Fed, after having said at the September press conference that, you know, these aren't my projections.

12:02Turns out that he's actually, you know, a pretty normal Fed chair. We can understand and interpret what he's doing. But it's short. But I was short. I'm going to jump in and I'm going to bring our viewers and listeners into a little bit of a TV secret here. Are you ready? Is that normally when the Fed has a press conference at 2.30, we kind of we know that the press conference is going to go past 3 p.m. We kind of sit back. We're here, but we're listening. We don't know today. This press conference could be over in 15 minutes. He could cut Steve Leishman and others less time, because I don't think this is a Fed chair, Matt, that likes to talk that much.

12:36So maybe others have to deliver the message for him. Well, that's the thing that we've learned, is that he is going to let others deliver this message, right? He could have contradicted his guys. He did not have to let the other members of the FOMC talk for him, and he chose to do that. But the very fact that the probabilities changed when the data didn't was because of this messaging, which suggests that, in fact, even though he says we're not going to do forward guidance, actually, maybe they are doing forward guidance. So let's just look at the statement here for a second, which is a little teensy bit longer than it was the first time.

13:11Again, just to quote Claudia Sama here, I think she is looking for the Fed to explain why it's doing what it's doing. What we get here is a decision to maintain the target range, continuing policy of ample reserves. Economic activity is strong. Uncertainty is elevated. Productivity growth is strong. Inflation is elevated. And all it says is the accumulation of more information will help the committee determine the policy stance appropriate. The accumulation of more information. So, Jeff, if we take the statement at face value, we're just saying we don't know yet. We don't know. And by the way, let's talk about the word accumulation.

13:45So that means not incremental data points. the collective record of data that they see, adding on new data points and not to, you know, whip around just because CPI one month was a little hot or a little cold. You know, I like this statement. You know, I think it reinforces a little discipline about trying to play the long game on this. Again, use the thermostat analogy. You change the temperature in September, let the room settle a little bit, see what happens, get data points like David was saying before. Let's ask an economist, Francis Donald. So I'm holding up the statement because it's so short, it's a couple paragraphs.

14:19Maybe that's good. Maybe that's bad. It's not for me to decide. You're the economist. What do you think? Do you like the volume of information that you're getting? Would you like to see more or less? Is it Goldilocks just right? I mean, here's the elephant in the room to Kelly's question is why aren't they explaining more? Because they don't want to say the quiet part out loud. Much of the inflation, which by the way, is very problematic is not interest rate sensitive. You have a lower and middle income consumer that is really struggling, that is saving less and borrowing more and seeing higher delinquencies come through.

14:55You have an economy as a whole that has become less interest rate sensitive, a housing market that is in the doldrum. I mean, explaining the value of central bank policy right now becomes much more complicated and certainly doesn't belong in an extra 200 words on a statement. It belongs in several novels and rewrites of textbooks here. So we can reduce the size of the statement. But the bigger questions around what the role of the Federal Reserve and other global central banks are in this new economy is not something that's going to be easily conveyed. We're going to hear a little bit more in press conferences.

15:29But these are big questions that are not going to get easily summarized. And I suspect that's why we don't even open the door to them in the short statements coming through. And just following up on what you're saying, Francis, one thing that I think we should focus on here is housing, because the only sector that really gets hit by rates much is housing. And housing is flat on its back right now with higher mortgage rates, but really a big turn in demographics. I mean, there's such a shortage in terms of potential homebuyers that the homebuilders are pulling out their hair. So do you really want to raise rates and hit?

16:00The only sector you're going to hit is one that is completely close to recession already. Yeah, we're worried about an overheating economy. rate increases are not going to affect what's driving it, which is the technology sector. And so these vulnerable consumers that feel that transmission more are already on the ropes. So really, it begs the question, why would you raise it? I feel, OK, Jeff, right or wrong, let's sort of, I don't want to say play a game, it's the Fed, but if the Federal Reserve today cut rates by 1%, obviously they didn't, rates were unchanged. If the Federal Reserve cut rates by 1%, 100 basis points, would the bond market, the long end, Would the 10-year move at all?

16:37I think it would. Unfortunately, I think it would be a credibility issue at that point. But would it move up? It would move up. See, that's the thing. This is critical to our viewers and listeners that are not Fed pros like you guys. The bond market right now feels like it's in charge. And if the Federal Reserve would even cut rates, I think, and it sounds like you agree. I agree. That rates would go, real rates would go up. They would. Not down. That's right. And that, I think, Warsh fully understands that. He's navigating. He's threading that needle. And so I think the credibility of the Fed is the bigger question.

17:09Let's hopefully have Kabuki theater for the press conference, whether it's 15 minutes or 25 minutes. He's trying to make this a non-event today. And so far, so good. Matt, he said he was going to remove a dose of accommodation. He did it. Right. We've seen financial conditions tighten since the September rate decision. That's exactly what he wanted. Now he's going to accumulate more data. The thing to watch is his prepared remarks at the beginning of this press conference. Right. We're not going to get anything out of this back and forth with reporters, although God bless Steve. I hope he gets something.

17:38No, I hope. And we all hope he does. Because Steve asked great questions. But my bigger point was that it's not let's not call it a credibility crisis. I'm not going to say that Kevin Warsh has immense respect on Wall Street and in Washington. That said, given that oil is at one hundred and two, because there's a very real risk of a re-escalation of kinetic war fighting in Hormuz. You got Russia blowing up Ukrainian ships. You got Ukraine blowing up deservedly, by the way, Russian oil refineries. I don't know, to Francis's point, what the Federal Reserve can do about any of that, which is largely a massive input in the inflationary pressure that we're seeing.

18:16I mean, unless the Fed can bring down auto insurance rates, home insurance rates, medical costs and the price of oil. I don't know what they can do about about inflation. solve it out, rant over. They raised a quarter point, citing geopolitical uncertainty. That geopolitical uncertainty persists. We'll see if Kevin Worsh brings it up again. I imagine he'll make some reference to it. But inflation will probably ease next year anyway. Why? Well, because you can have a short, sharp attack in Iran, but we know how this is going to end. However long that lasts, and maybe it's a few weeks or whatever, eventually all the oil is going to flow out from both Iran and everybody else in the Gulf states.

18:56Also, tariff rates are going to be going down. That helps. We don't have any wage growth. We've got strong productivity growth. And also the housing issue. Housing is a big driver. And we've got terrible demographics. That's got to push. The rental vacancy rate today hit its highest level since 2014. That's going to put down pressure on rents. That's a big, it's a third of CPI is going to get swished by that. And so all these things say, look, inflation is going to moderate anyway. The Fed doesn't need to be in a panic here. And with the election six days away, just this is the right thing to do.

19:28So can I point out they have raised rates at least twice in recent years, this six days before an election. 2022, they've changed rates. 2022, 75 basis point hike, six days before an election, exactly where we are now. 2008, half point cut, six days before an election. Those were two very different environments. But the idea that they don't act before an election, it's the same. It was a pandemic, man. OK, they don't have to. They don't have to. They don't have to. And they don't have to. I thought Steve Leishman was gone. I thought you were racing off into lockup. You are still there. Just as I was complimenting you, Steve, about the great questions you ask.

20:05Well, I appreciate that, Brian. And as I said earlier, my great hope is to ask a question that doesn't engender the answer of we have a task force for that, which is. the way that Kevin Worsh has wiggled out of a bunch of questions. I would just point out that it would seem very strange for inflation to come in 3 % month after month and to think the Fed should do nothing because you believe it won't have an impact. It will have an impact. It will have an impact on aggregate demand and having a weakening aggregate demand will bring down parts of the CPI that will reduce the overall level of the CPI.

20:45So it's interesting how many people seem to have given up on the idea that the Fed can affect the economy. It can. It's why the market pays so much attention to it. It's why we pay so much attention to it. And I modeled in the 30 basis points that we're expecting for the PCE quarter rise tomorrow. That brings the year over year rate to 3.1%. And then I modeled in the 0.25 that the Cleveland inflation now casting number looks to have for the month of October. That brings it up again. So you're going to have not just a high inflation, but rising inflation over the next couple of months. And I don't think you want a Fed to stand by and lose all credibility.

21:23Right. But David and others are saying, where are we in 12 months time? If rents and housing are putting downward pressure on inflation next year and oil prices don't keep rising. if monetary policy acts with a 12 to 18 month lag, one month, Steve, isn't the accumulation they're talking about. Well, if you want to make a bet on that, Kelly, that's fine. But there's a lot of stuff that happens between now and 12 months from now that would make me concerned. I know what's in front of me now, and I can pretty much look forward to the next two months of 3 % plus core inflation, which would continue this run of five and a half of six years of inflation being well above target.

21:56Right. Which started with the 20 % cumulative increase that they let happen during the pandemic and in its aftermath. Let's get to Chim Carson. Sort of irrelevant. I mean, we're good. Well, no, it matters a lot to the public and it matters to the Fed if they're still out there trying to fight it and fight the Chim. Go ahead. Chim Carson's out at the at the CME or CBO. Go ahead. You have to realize there's 200 there's 250 trillion dollars of public and private equities when the market goes up 10, 20 percent like it did earlier this year. You get a 50 trillion dollar push of new collateral in the market.

22:27That is what has drove a lot of the earnings growth, but it also has driven more and more CapEx. That's what we're seeing CDS blowing out. And what we started to see as interest rates started to go up is the crowding out of bonds writ large and CDS starting to blow out. That has continued to happen. What's happening now is we have a cap on the market. If earnings continue to go, if the market continues to go, ultimately we're going to start breaking things like CDS and other parts of the markets. And the bond market is going to keep going. So ultimately, when people talk about forward looking, why can you project that earnings are going to come down?

23:00It's because the amount of liquidity that we would need to keep pushing this forward is less likely to keep going at this point, given the amount of leverage and the amount of CDS that's blowing out here. So I really think people need to look at the total dynamic that happened earlier this month, when the long end of the curve started breaking out and all of the flight back to safety in the bonds that happened. And think about what that means if we start running again, if things start heating up again. All right. Chem, thank you. Chem Carson, we appreciate it. Thanks to everybody for being here, our panel.

23:29To Steve Leisman, of course, to Matt Peterson, David Kelly, Jeff Blazik, and Francis Donald. I think we'll hear more from a few of you after the break, Francis, I think. And a quick programming note, I'm going to be sitting down with Treasury Secretary Scott Besson exclusively at 4 p.m. Eastern time today. We've got Microsoft earnings, got Google earnings. Then we've got the live exclusive with Secretary Besson. That is going to be a big 4 p.m. Eastern time hour, but don't go away. We've got a lot more to do, including a press conference from the Fed chair, Kevin Warsh. That's next. Stick around.

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25:39Welcome back. Just a couple minutes away from hearing from the Fed chair himself, which is a rarity. So enjoy it. Kevin Warsh will have his press conference. It may not be that long. We're not sure yet. Let's bring our panel back in. David Kelly of JPMorgan Asset Management, Jeff Blazik of Neuberger Berman, or I don't know if the Berman's still there, Joe Livornia, former senior counselor to Treasury Secretary Besson, and Francis Donald of RBC. Francis, let me just quickly kick it out to you. What are you listening for? And as we come back from break, what are your feelings once again about the dissent, Lisa Cook, about the statement about everything else going on.

26:13There'll be a lot of interest in that new dissent, I should say. But going into this press conference, I just want to hear more about how they are thinking about their mandate, which is doable or just inflation. Where are they coming around with that? Brian, you mentioned energy earlier. No, this is not just an energy story. Half of the items in the CPI and PCE basket are running above 3 percent. Half per the Fed's own measurement are demand side, not supply side. And the Fed does have a rule here to contain high energy prices from bleeding broadly out. Does that mean hiking at every meeting? Probably not.

26:47But they have more to do to explain why they're not moving forward and how much more they have to do. I want to hear from Fed Chair Warsh about that. All right, Joe, I just love the Fed statements. It was great. I mean, short, it was sweet. The chair really wants to get rid of forward guidance and add risk premiums to the market, which I know some people don't like. But it does, I think, give the Fed some flexibility. It minimizes the chance of great misallocation of capital, which we've had in the last few cycles. I agree with you, by the way. I always hated the dot plot. It's what they call Ford guidance.

27:21I called it the Fed's light bright because you could just, remember that game, light bright thing? You could just change it as you want it. So what was the point? Well, they may change the dot plot. Maybe they put names. Maybe they get rid of it. Maybe they fewer meetings. I just like the fact that the chair is making us try to figure out what the Fed reaction function is, which I believe we will learn over time as we get more meetings under our belt. And there was a usefulness in the forward projection when we hit zero and they needed to tell markets, no, we basically want to go negative without going negative.

27:49Right. David Kelly, if you go back to that era, which fortunately is in hindsight, we are not in that era anymore. The usefulness has been outlived. You know, we backed up to about 530 on the 10 year treasury. And then we've got more and more information that suggested, OK, we're not going to raise rates in October. And so to me, there's sort of a leaking forward guidance here. I actually I prefer forward guidance to forward silence. I think forward silence just builds in a risk premium which we don't need. And so I think, in fact, we may get a little bit of, again, unintentional, unnamed forward guidance in this press conference, because what he's going to try and do is make sure that people understand that December is we're probably going to raise rates then.

28:26And so he's going to have to make some pretty hawkish statements, but it emphasizes there's a lot of information. He'll talk about the earnings season. He'll talk about the AI trade. He'll probably talk about the employment report. He'll try not to talk about the midterms. Although that's really what I think he's thinking about. But I think all of that, I think he'll make it clear that, look, this is just about getting more information. But as it stands right now, rates probably will need to move up a little bit more. Whether in his initial remarks or in the Q &A, financial conditions to me is going to be the really interesting element.

28:52because that could be dovishness in hiding. That flies, the dove comes out and flies. How much do you think they're watching AI? Quickly, Joe. Full time, every day, they're watching it. Joe, you agree with that? 100%, yeah. I mean, it's driving the equity market. It's having positive wealth effects. It's obviously reinforcing the CapEx story. So, Francis, is AI the captain now? Brian, everybody is watching AI. It just matters from what angle. Who's building things? How is it flowing through inflation? What does it mean for jobs ahead? And what does it mean if it's slowdowns in 2027? This is a full-time preoccupation for everyone sitting at the Federal Reserve and, frankly, the rest of us.

29:31All right. So really appreciate the panel. I probably shouldn't say goodbye because Kevin Warsh is normally on time, Kelly. It's exactly 2.30. But if he doesn't come out, we're just going to keep talking. Well, we should get a quick look at the markets just before he does that kind of a wide look. Just at the stance of often the much bigger mover, especially in a meeting like this, is the press conference. Why? because to David's point, if he wants to still keep December as a live meeting, the possibility of a hike still in the markets, he's going to have to signal that. And that is usually a stock unhappy event.

29:59So right now, the Dow's up 90. The Nasdaq is back in negative territory. S &P's up 13 points. And the 10-year has moved up a little bit, Jeff, to 5.028.

30:11There's Kevin Warsh. Good day. This morning, the FOMC decided to maintain the target rate for the federal funds rate at 3.75 % to 4 % in support of the Federal Reserve's dual mandate. Economic activity is expanding at a strong pace. While uncertainty remains, owing in part to geopolitical developments, domestic spending has been resilient. Productivity growth is strong and capital investment robust. Job gains have kept pace with the workforce, and the unemployment rate has changed little, but inflation remains elevated. The committee believes that the accumulation of more information will help it determine the policy stance appropriate to ensure a timely return of inflation to the 2 % goal.

31:05The committee will deliver price stability. At each policy meeting, my colleagues and I assess the economy by looking out the window. It's what we call interrogating reality. To gauge what's really going on, it is not a task that has grown easier. So what exactly do we observe? Economic growth has strengthened. The GDP increase in the first half of this year was revised up from an earlier estimate of 1.8 % up to 2.4%. And the third quarter appears to have brought an even more rapid advance, led by healthy consumer spending, likely running above 3 % growth, and business investment likely rising at about a double -digit pace.

31:57Capital expenditures are at a historically high share of GDP. High-tech investment is leading the acceleration. But there's also been a broadening in other categories, and these trends bear watching. What about the jobless rate? The jobless rate is lower than a year ago, and payroll growth is noticeably above last year's pace. The four-week moving average of unemployment insurance claims continues to run at the lowest level in generations. So on the employment side of the Fed's dual mandate, conditions are quite positive. And yet Americans, of course, are still dealing with inflation that has been running above the committee's objective for close to six years.

32:45It's our responsibility to get inflation down. That's the reason the FOMC's discussion over the last couple of days focused mainly on the price stability side of our remit. Since our policy action in September, we have started to see some changes in financial and credit conditions. They have tightened for some businesses and households, much as we would expect. Market participants are becoming somewhat more discerning in their capital allocations. And while overall financial conditions are tighter, I'm unwilling and unable to call them tight. But broadly, these developments go in the direction of achieving a longer, more durable period of economic growth and price stability.

33:35Over the last couple of days, the committee had a good discussion of the changes in the economic and financial landscape that marked this intermediary period. we discussed geopolitical developments and fast-moving changes in technology. We observed, but were not surprised, that financial markets showed bouts of volatility and shifting correlations. So as we widen the frame to survey the broad economic and financial picture, real activity is clearly pointing in the right direction. That's good news. But inflation is too high. Energy and related prices have moved higher again in recent weeks. And our job is to ensure that relative price changes in some sectors do not broaden out across the economy.

34:25And that inflation expectations remain as they are anchored. While these uncertainties are real, there's no lack of clarity in our purpose at the Fed. Since becoming chairman just five months ago, I've been honored to work with FOMC policymakers who are unambiguous in their commitment to stable prices. We've made clear our readiness to act as circumstances require, and we have shown our willingness to act. The information we receive over the coming period will help us determine where we want policy to be. And at every turn, good or bad, our job is to get monetary policy right. And that's exactly what we're doing.

35:12Now, with this objective in mind, we've decided on a change in our FOMC schedule starting next fall. We believe eight meetings per year is the right number for the FOMC. But in 2027, one meeting will focus exclusively on broad monetary policy strategy. with neither a vote on the federal funds rate nor a policy statement anticipated. The rest will be regular FOMC policy setting meetings. And I expect that in 2028, we'll have two meetings dedicated to discussions of strategy and six for setting policy. Now, what's the reasoning behind this change? To me, it's quite straightforward. Getting policy right involves assessing near-term developments at timely, regular, and information-rich intervals.

36:04But it's equally important we reserve time and space as an intellectually diverse group for strategic deliberations, for thinking anew about big questions, looking out over longer time horizons, focusing, as I say, on the left side of the decimal point. I believe the setting of the meeting schedule and agenda is more than some administrative detail. It's an institutional choice affecting the nature and the quality of our deliberations and ultimately the wisdom of our decisions. It's yet another change to get the conduct of monetary policy on the right track. I appreciate your attention this afternoon.

36:46Now my time is yours and I welcome your questions.

36:52Thank you. Colby Smith at the New York Times. There's been essentially no progress toward the 2 % inflation target. The labor market remains stable, as you suggested in your opening statement, and most of your colleagues seem to be on board with raising rates in December. So why not just raise rates today? So it's a good question. I will say I read your stories the last day or two, so I must admit I sort of saw that question coming. What I said in my prepared statement was information in the coming period will help us tell us where we want to be, but I suspect you want a little more than that.

37:30So let me give it a shot. Ensuring price stability, Colby, quashing inflation is not about some fixed individual date on a calendar. Same way it's not about some isolated data point. If it were about those two things, this job would be easier and we wouldn't be suffering from nearly six years of inflation above target. So what's this about? It's about ensuring we have clear objectives and it's about a monetary policy strategy, which might sound to your ear and others like a change from the last several years. So let me step back. in the five months or so that I've been around, we've put in place what I describe as new monetary medicine.

38:18Well, what's been in that package of medicine? First thing we did when we showed up with my colleagues is we doubled down on the 2 % inflation target. We said, we own it. We're taking responsibility for it. And if you think that we're tolerating some inflation target somewhere in the twos, let us disabuse you of it. That was the first part of this, new monetary medicine. Second part is we took responsibility. No anguish of central banking here, no blaming others. It's the third thing that we've done. We laid out for you and the world our framework. I did it in Jackson Hole, was part of the discussion the last couple of days.

38:57There's the framework that many of my colleagues cue to as well. This is how we think about how monetary policy should work. These are the transmission mechanisms, and this is how we're going to deliver. Then what do we do? We interrogate reality. We do that periodically. That's a very useful thing to do. But we don't just talk, we act. And so in September, when we last met, we acted. We removed a dose of accommodation. So what are the signposts about how this new strategy is going? Inflation compensation, as measured by swaps, prices, many other measures, inflation compensation is going in the right way.

39:35inflation expectations the world is quite unsettled if you'd say absent the fed what would have happened to expectations they might have gone the wrong way they've gone the right way too so i feel good about those signposts the period right in front of us is information rich there is a lot that's happening in the world my colleagues and i are keen to take notice of it So in this coming period, what do I think we're going to be able to do? We're going to be able to figure out what's the appropriate protocol as part of this package that we started to deliver five months ago to deliver price stability.

40:16I'm encouraged by the progress we've made in a short period of time. But if the crux of your question is you haven't delivered yet, you haven't achieved price stability, you're right about that. But we're working on it.

40:33Thank you, Chair Warsh. So if I could, this statement says that the accumulation of more information will help the committee determine the policy stance appropriate to ensure a timely return of inflation to the 2 % goal. Does that mean that the current level of the Fed funds rate might already be the right one?

40:54Well, we've got to determine the appropriate protocol. if you were listening next to me in that room the last couple of days the overwhelming consensus the overwhelming judgment is that what we've done in this monetary medicine starting to work some but there's no firm conclusions if we had a firm conclusion about the conduct of monetary policy we'd announce it to much fanfare today what we decided to do was to colby's question take stock of where we are, evaluate what we're seeing out the window, ask ourselves whether the period right in front of us is likely to provide more clarity on the appropriate protocol.

41:37My judgment, the judgment of my overwhelming number of colleagues is that it would.

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43:15Mr. Chairman, thanks for taking our questions. Before the meeting, several members of the board and the committee went out and told us that we were going to take more time, and that had a profound effect on the outlook for the funds rate. Were you involved in discussing that message with them? And if you don't mind, I'm sorry, but a protocol question. What will be the disclosure, public disclosure on the meetings where you're not going to have a statement? So two questions. I'm sorry. Those are two questions. I know. Did you not hear the one question rule? I did, but I thought there was like a protocol thing I could do.

43:49I would. That was like a parliamentary procedure question you were asking. That didn't count. I hesitate to indulge the second question. I fear what it would do. But let me see if I can do it and not have the slippery slope among us. Your first question was about my colleagues. I've got 18 quite independent colleagues. If you were inside that room the last couple of days, you would come to believe that to be true. One way to test the independence of my colleagues is, I don't know if you've heard, Steve, but I don't submit a dot. I don't plan on submitting a dot. But the 18 of them do. To suggest somehow that I am some kind of all-knowing person sending messages out, that's not the committee of the FOMC that I know.

44:37These are serious, sober, responsible people. We had a serious, sober discussion. So that's the answer to that. On the parliamentary question, which doesn't count as a question, I'll just say this. We've made a decision that at that strategy meeting in 27 and the two strategy meetings in 28, I do not anticipate making any policy decision, putting out a policy statement. But what might we come out with? It's not obvious yet. There's more news to come on that. The decision on the new format for the meetings is relatively new. It was a robust discussion over a couple of meetings of how to handle that.

45:15As we get details of that, which are still now not until next fall, we'll be prepared to share them with you.

45:25Hi, Nicole. Good kind of with Barron. Thanks for taking my question. In September, you mentioned that the Fed has a role in sustaining the economic progress happening in America right now and in the rising opportunities that come with it. I'm wondering if you can expand on whether you see this as a mandate and how you intend to fulfill that mandate. So the mandate was given to us by Congress. The mandate was deliver stable prices and deliver full employment all in the context of financial stability. Now, they gave us some other homework to do on supervision and regulation payments, but I presume you're talking about monetary policy.

46:00So what's the best thing we can do in this environment, looking out our window to deliver on that remit? Ensure stable prices. I mentioned, I think, at a prior press conference, if you were trying to do the most harmed, the least well-off among us, you would let the last six years of inflation above the Fed's target, usually well above the Fed's target, you'd let that continue. So that's the most important thing we can do as we look out the window, and that's what we plan to do. You probably heard me say this. We will deliver price stability. No ifs, ands, or buts, and that continues to be the case.

46:36Eleanor Mueller was said before. Wanted to ask you about the working groups, when we can expect the reports to come up, and if there is anything you can preview for us, whether it's on AI or data or balance sheets. Sure. These five task forces are hard at work. I have scarcely seen anything that would constitute a final report, but I have done some periodic check-ins with them, and I am impressed by the rigor of the intellectual discussions, by the seriousness of the task that we've given them. Now, some of the questions that I asked to kick off the reports, they want to answer those and answer a whole range of other questions, which might go to other task forces, but I'm impressed by what they're doing.

47:24I gave them, like I told you, a year-end deadline. I think some but not all of the groups will probably hit their deadline and turn their homework in on time. But that just begins the process by which we're going to be consuming, which is intellectually serious work. That's a catalyst for us to think anew about productivity and jobs and an inflation framework and what's the best data to help us do our job, how to think about the balance sheet task force. These are huge intellectual investments that I think are going to bear fruits in the next policy conjuncture. Unlikely to find their way into this policy conjuncture, given the important role as consumers of these ideas that my colleagues have.

48:11But I will have one small announcement. I previewed this when I was at an IMF meeting, much to the chagrin of some of my colleagues around here. on November 16th, the Productivity and Jobs Task Force will be doing a field hearing, inviting a broad range of people who have strong views. What are the implications for jobs in the economy near-term, medium-term, long-term? Is this a productivity miracle that's going to happen, or will it happen slowly? I know I, for one, am keenly interested in refining my own views on that question, but that task force decided that they wanted to hear from more people as part of their undertaking.

48:50I plan at attending. I might have a few words to say at the outset of that conference. I expect the conference will go three, four hours. It'll be pretty wonky stuff. I don't know how good the material will be for the likes of you and your colleagues, but it's a purpose to do a lot of listening for me to interrogate the reality in front of me. What do experts in their fields think about this? What are the implications for the dual mandate that I referenced to your colleague. Is this going to make it harder or easier for us to achieve price stability over the next several years? What are the implications for jobs, medium and long-term, but near-term too?

49:28So we're going to explore those largely in the public realm on November 16th. I look forward to seeing you there. Thank you so much. Thank you, Mr. Chairman James Rosen with Newsmax. You spoke of interrogating reality. Since reality is a no-show here today, I'm going to satisfy by myself with interrogating you. You spoke earlier in your remarks here today about how your colleagues are serious and sober people who are committed to price stability. In an event in the Oval Office on October 7 of this year, President Trump said, and I quote, Kevin is great, but Kevin's one vote out of a board with numerous people that were put on by Obama and Biden and a couple by me.

50:09So you have a board that would like to see the country do badly, in my opinion. Do you agree with those comments? So, James, I appreciate the question. I'm not going to be responding to quotes from public officials. What I can tell you is my experience in five months here. We just came out of a heck of a family fight, a serious, sober discussion. I think we came to the right policy decision for this moment, and I'm honored to be here and honored to be the chairman of this group.

50:46Chairman Walsh, Maria Luis Acapurro with Bloomberg News. So the economy is strong. Inflation is well above 2%. You're saying inflation expectations are going the right way, but surveys show that households expect inflation to remain above the Fed's goal, and not just for the short term. Using a hike today, are they waiting for more data? I haven't really heard the clear arguments as to that decision. So do you worry that with today's decision, households may not believe your pledge to bring down inflation clearly and at sufficient speed and instead will read this decision of holding rates steady as a sign that the central bank has, in fact, a soft inflation target?

51:28Yeah, so what I can do is tell you there's no soft inflation target. There's no implicit inflation target. There's a target of price stability, and it's 2 % as measured by PCE. it took six years to for inflation to have the effect on consumers that you reference but i would say this when consumers interrogate reality they look outside their window too they go to the gas station too and they see that prices are up i am the not going to be the guy who says that oil prices haven't gone up and when they fill up their tank they don't see it and so So inflation's gone up in expectations in the very near term because they're doing what we're doing, interrogating reality.

52:14But if you look out over the horizon, if you look at most but not all measures, what you see is households, businesses, financial markets, they have the confidence that they should have that the central bank will deliver price stability. Edward, Lawrence.

52:36thank you mr chairman edward lawrence fox business um so do you see a direct line correlation between oil prices and the inflation we're seeing in the united states and if so how fast could inflation fall or react to falling oil prices so i don't want to engage in hypotheticals but i can look out look out our window and see what's happened um there'd been a stable correlation between oil prices as they've moved up this year, generally, and interest rates. Not the interest rates that we control, but interest rates set in the market. That correlation has been quite strong until very recently. We've seen oil prices continue to move up, largely due to geopolitical events.

53:21We've seen crack spreads between oil and refined products continue to stay elevated. But what's happened? And interest rates have rolled over to the downside. Not a Wall Street newsletter. I'm just telling you when I look out the window over the last several months, that is what we've seen. To the extent that oil prices were to move lower, again, probably due to geopolitical events, that's something that we're going to have to interrogate. What are the effects on the Fed's dual mandate? What are the effects on financial market prices and what are we going to do about it? But that's a hypothetical.

53:59And in fact, if we look at financial market prices, futures prices for oil, they've moved up over the course of the last several weeks. And I can't help but take note of that too. Claire.

54:17Thank you. Claire Jones, Financial Times. much of the growth that we're seeing in the US economy now and quite a bit of the inflation too is coming from the AI boom there's quite a lively debate as to whether or not you know this is a part of the economy that's sensitive to interest rates in the same way as say housing I'd love to get your sense of you know do rates need to rise more given that so much of the US economy now is about AI than it otherwise would if, say, you know, housing was a bigger part of the story. Thank you. Thank you, Claire. So there was a narrative for quite a while, maybe even in this room over the course of the last several press conferences.

55:03Well, they're going to raise rates. They're talking about raising rates, but it's not going to have any effect on AI because the returns that investors are expecting are so different. I was skeptical of that view. Interest rates get in the cracks. Interest rates affect directly or indirectly almost everything. And what have we seen since early September? Remember, what we've seen inside of the technology complex, outside of the technology complex, whether you pronounce it AI or SI, Claire, is up to you. What have you seen? Interest rates have had an effect. You see market participants that are discriminating between the kinds of investments they want to make.

55:53You've seen credit spreads for certain assets widen out. gap out. For others, you've seen some tightening in financial conditions, but not significantly. So on the thrust of your question of, with respect to the new technology and this investment surge, do interest rates matter? I believe they do. And I don't believe that they're somehow divorced from the rest of the economy. Secondly, I'll just say this. It is convenient to say that the strength of the economy is all about this new technology wave. In fact, if we look at the data, really including data from the last meeting till this, the CapEx story is not just robust, not just strong, but it is broadening.

56:40And so if you want to tell the story somehow that this is strength we're seeing only in narrow pockets, it's a much harder story to tell now than it would have been several quarters ago. Thanks so much, Elizabeth Schulze with ABC News. As you know, the midterm elections are in six days. Did the midterms factor into the Fed's decision to stay on hold? And if not, how can you assure the American public that politics were not at play here? So politics played no role in the decision. I just spent two days with my colleagues upstairs. I didn't hear an utterance about politics. I didn't hear a reference to politics, elections, what's happening in the next week or so.

57:29I didn't hear anything about it. And I don't believe it had any role in the decision, not just for me, but my colleagues around the room. But I will say it's an information-rich interval in the coming period, having nothing to do with politics. Chris Rugeber. Hi. Thank you, Chris Rugeber at Associated Press. I know you don't like the statement of economic projections, but last month they did – your colleagues penciled in another rate hike for this year. And so could you give us your sense from this meeting whether you still see widespread support for another hike this year around the table? Thank you.

58:10So the blackout period for them ends, I think, on Friday or at some point over the weekend. So they might indulge you in that discussion. I don't believe in forward guidance absent exigent circumstances, absent a crisis. I have to give that caveat because in the darkest days of the 2008 financial crisis, in part using some literature and thinking from a very recent Nobel Prize winner, that kind of forward guidance is actually quite helpful. But in normal, ordinary times, especially times where the underlying real economy is this strong, I don't believe in it. I don't favor it. I also don't believe in prejudging meetings.

58:54A lot of things can happen. So I'm not going to be able to share with you my musings about what happens when this group gets together six weeks from now. But my judgment is that we might learn a lot. And like in my response to Colby's question, we'll be, I think, better positioned to determine the right policy decision and the stance of policy.

59:24Hi, my name is Sang-un Lee from the Korea Economic Daily newspaper. I got a question as a foreign press. You have spoken several times about the possibility of the Fed shrinking its balance sheet further. If that plan moves forward later, how would you avoid the disrupting foreign official holders of treasuries or dollar funding markets abroad like South Korea and Japan? So thank you for your question. First off, I would say I pay probably more attention to the Korean economy than you might think, because when I'm looking at the feedstocks effectively for this new surge in technology, a lot of it's coming from Japan and Korea, some from Singapore.

1:00:09So I'm particularly interested in what's happening in the Korean economy, usually because it's telling me what's on planes and ships coming this way. Secondly, I should say that your new central bank governor is someone I've known for 20 years and is a very talented guy and a good friend. So I'm glad he's in that post. He and I met actually about 20 years ago amid the global financial crisis as it would come to be known. And I remember this is a generation of discussions with him about the use of the balance sheet in exigent circumstances like we had then. At this point, the balance sheet is solely within the four walls of the balance sheet task force.

1:00:53Now, I have checked in with them, full disclosure. They're working away and comparing their best thoughts. And I think the conclusions they come to, the recommendations they come to, will be fed into the FOMC probably early in the first quarter. But don't hold me exactly to that timing. and if we decide to make changes in the balance sheet, it'll be after a serious consideration of their proposals and their recommendations. I think it is unlikely to have any material effect on this policy conjuncture, but it's a question we should get to the bottom to, and I look forward to doing it with the help of the outside task force.

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