On Wednesday, the Federal Reserve issued their October rate decision announcing that there would not be any changes to the Fed Funds rate. A pause holding the fed funds rate at 3.75%-4%.

This pause was well choreographed and expected by markets. Only two members dissented (with those two members voting for a raise due to supply shocks from energy). Markets continue to price in a likely increase in December (86% chance per the Fed Fund futures).

Fed Chairman Warsh was clear that while the Fed understands inflation remains too high, they have been encouraged by the results of their last hike and simply wanted to allow for more time.

“Real activity is clearly pointing in the right direction. That is good news. But inflation is still too high” Fed Chair Warsh stated. He elaborated that the financial markets reacted the way he expected from the removal of a “dose of accommodation” (ie: last hike) but that he did not believe financial conditions were tight. He was focused on the inflation side of the mandate and the Fed’s goal to reduce it. “Americans, of course, are still dealing with inflation that has been running above the committee’s objective for close to six years. It’s our responsibility to get inflation down”

Warsh also faced questions about the impact of rates on the AI buildout (which has been a meaningful contributor to growth in the US economy). Warsh was not worried that rising rates would slow down the AI boom but rather stated that rising rates encouraged investors to be more discerning as many companies are now turning to the debt market for AI financing (which will be impacted by higher rates to a varying extent for each issuer). He also stressed that there is a broadening in economic strength, noting business investment is “not just strong, but it is broadening.”

Lastly, Warsh announced that in 2027, there will still be eight Fed meetings but that only seven would contain a rate decision. In 2028, policy-setting meetings will drop to just six.

What’s the effect of this pause and the related commentary? The pause and the comments were expected. The bottom line from this meeting/announcement still appears to be an environment of higher rates for an extended period of time with the backdrop of an economy that has the GDP growth and strong employment to withstand it. Inflation remains the issue and the Fed has room to address it head-on with higher rates.

Higher rates will inevitably make markets and investors more discerning between asset classes and individual companies. Falling rates tend to lift all boats indiscriminately but rising rates do not. This will require more investment discipline, careful attention to valuations and earnings, and a renewed reliance on income for return contribution.

Onward we go,