Warsh’s Top Fed Deputies Step in to Give Markets a Clear Message

(Bloomberg) -- Federal Reserve Chairman Kevin Warsh has vowed to avoid sending clear signals to investors on where interest rates are headed. His top deputies made clear this week they're willing to oblige — and investors showed they're still listening.

Fed Vice Chair Philip Jefferson and New York Fed President John Williams said in separate speeches they believe the central bank has time to assess the economy before considering another rate increase, comments that reeled in investor expectations for a rate hike this month.

The remarks — delivered just two days apart — don't mean the Fed won't adjust policy any further. Officials continue to warn that inflation is too high, and consumer price data due on Oct. 14 could play a big role in that debate.

Yet close observers of the Fed said the takeaway from both speeches was clear: Traders had gotten ahead of themselves in betting on another hike in the wake of the Fed's Sept. 16 rate increase, and just as huge leaps in bond yields were sending borrowing costs sharply higher.

Before Williams spoke on Tuesday, traders saw the likelihood of a hike at the Oct. 27-28 meeting at 70%, based on pricing in federal funds futures. By the time Jefferson finished his speech on Thursday, those odds had slumped to around 25%, helped in between by softer-than-expected inflation data.

As the head of the New York Fed, Williams not only has a permanent vote on policy but also serves by tradition as vice chair of the Federal Open Market Committee. That person has long been considered — alongside the chair and vice chair — part of the central bank's leadership "troika" on monetary policy.

Under some past chairs, investors assumed that remarks from the vice chair or New York Fed president were used to signal the views of the whole troika. There is no evidence, however, that Jefferson and Williams coordinated their speeches with each other or with Warsh.

Still, Goldman Sachs economists said the combination of the Jefferson and Williams speeches cemented their view that an October hike is unlikely, a conclusion shared by others.

"We think the joint message from Jefferson and Williams is authoritative," Krishna Guha, head of economics at Evercore ISI, and colleagues wrote in a note to clients Thursday after Jefferson made his remarks.