Fed's informal guidance may be limiting its flexibility
TLT•Frequent public comments by Federal Reserve officials may constrain policymakers' flexibility despite the Fed moving away from formal forward guidance. Fed funds futures traders priced in a 7% chance of an interest rate hike on Wednesday.
1. Guidance and flexibility
Frequent public comments by Federal Reserve officials have created something close to a substitute for formal forward guidance, potentially limiting policymakers’ room to maneuver, FHN Financial chief economist Chris Low wrote. Fed Chairman Kevin Warsh has argued that forward guidance limits flexibility, while other policymakers have continued to offer their views and likely voting paths, Low said.
2. Rate decision outlook
September inflation came in hotter than expected and energy costs remain high, but fed funds futures traders were pricing in a 7% chance of a rate hike on Wednesday. Low said a hike could have more impact because markets did not expect one until December, and could give Warsh an opportunity to demonstrate how guidance limits the Fed’s flexibility.
