Warsh speech leaves rate hike bets steady, PCE data offers next challenge

Markets did not shift much following Fed Chair Warsh's appearance. Expectations for December remained largely unchanged.

The previous day's meeting had limited impact. The upcoming US PCE inflation figures could prove more influential.

The probability of a 25 basis point rate increase in December is priced at about 84%. This is down slightly from the 88% seen before the meeting. Warsh placed the next move in the hands of economic data. The inflation report will test if that confidence is warranted.

The following estimates have been published for the September data:

• Headline monthly PCE: +0.5% m/m (Prev +0.3%)
• Headline annual PCE: +3.6% y/y (Prev +3.4%)
• Core monthly PCE: +0.3% m/m (Prev +0.2%)
• Core annual PCE: +3.1% y/y (Prev +3.0%)

Figures matching these forecasts would confirm that inflation is proving sticky. It would reinforce the view that price growth continues to run well ahead of the Fed's 2% goal.

The core data is the primary focus for inflation analysis. A strong print would validate current pricing for December and could stir some unease across markets. A weak print might lead traders to reassess their conviction in another hike.

The direction of risk currently leans toward a weaker outcome based on what is already priced.

A further hot inflation number would struggle to shift December pricing much further given it is already near fully priced. A softer number, meanwhile, could introduce some second-guessing and produce a larger market move.

Personal spending data will also be released. A monthly rise of 0.5% is forecast. Any deviation could add further complexity to the Fed's task of balancing its objectives.

The Fed meeting largely cemented the view that a December hike is coming. The PCE report presents the first meaningful test of that assumption.