The Fed has a new chairman, and Wall Street is still trying to figure out how he operates. Last week’s inflation numbers came in hot — consumer prices rose 3.7%, wholesale prices jumped 6.3%, the biggest gain since 2022. Fed Chair Warsh says he is done telling markets what he plans to do ahead of time. Here to break down all of this is Kevin Ford, FX and Macro Strategist at Convera. Kevin, great to have you back.
Thanks, Johnny. Happy to be back.
Consumer prices rose 3.7%. Wholesale prices up 6.3%. Both hotter than expected. What jumped out at you most?
The short answer is yes, inflation is heading in the wrong direction. What jumps out is the gap between headline CPI at 3.7% and core CPI at 2.6% — energy is driving much of that divergence. Energy prices are up 20% from a year ago while shelter was up 3.2% and food 2.5%. This is primarily an energy shock — but it is not confined to the pump. Core CPI rose 0.3% in September while the headline rose 0.6%. Oil remains above $100. Higher transport and production costs can broaden into inflation expectations, wages, and services prices. The Fed cannot dismiss this week’s data as just noise.
Wholesale prices are what businesses pay before goods hit store shelves. They are rising much faster than what shoppers pay. Does that mean more price increases are on the way?
The PPI-CPI gap is a warning. But I would not read it as a direct measure of price increases waiting to reach consumers because the two indices cover different baskets. The stronger signal is the composition of PPI — energy prices rose 10% in September, but core PPI rose 0.7% and services rose 0.8%. Transportation and warehousing increased 3.4%. That tells us the pressure is much broader than just crude oil alone. More pass-through is likely — but it will be uneven. Companies with pricing power will raise prices. Others will absorb the pressure through margins. Headline retail sales look strong, but excluding gas they rose only 0.2%. The demand is resilient rather than booming.
Warsh said he is no longer in the business of signalling the Fed’s next move. Are markets too relaxed about another October hike?
Yes. Markets may be too confident about the timing rather than the direction. October hike odds rose to 54% after CPI, then fell toward 28% before Warsh spoke, and ended the week at 15%. Market treated the absence of any signal as a hold signal — even though Warsh reiterated he is not in the forward guidance business. A hold is still the most likely outcome for October, as several senior officials have argued for patience. But 15% looks low against inflation at 3.7%, core CPI at 2.6%, and financial conditions that Warsh recently described as not broadly restrictive. His rejection of forward guidance means markets have less protection from surprise.
What would push Warsh to raise in October or wait until December?
October would require the whole committee to conclude that waiting carries more inflation risk than acting back to back. The case for action: both headline and underlying producer inflation surprised higher and the economy remains resilient. The case for waiting: much of the shock is coming from energy, employment growth has slowed, and the Fed can assess whether higher yields are already tightening conditions. December offers a fuller picture and updated economic projections — allowing the Fed to distinguish between the oil shock and a broader change in inflation behaviour. My base case is a hold in October with a clear tightening bias. A December hike becomes more likely if core inflation remains firm, expectations move higher, and activity proves strong enough to absorb another increase.
For our viewers in Latin America and the Middle East — when US rates go up, which currencies feel the most pressure and which ones hold best?
The cleanest dividing line is between high-carry commodity exporters and more externally vulnerable importers — versus dollar-pegged Gulf currencies. In Latin America, the Brazilian real has held up well because Brazil combines high real carry, credible monetary policy, and commodity exposure. The Mexican peso has been more mixed. In the Middle East, the Turkish lira and Egyptian pound remain most vulnerable — both face high domestic inflation and external financing pressures, while Egypt is also exposed as an energy importer. The UAE dirham remains stable because of the dollar peg — although the trade-off is that domestic monetary conditions tighten alongside whatever the Fed does. Investors should watch three variables: US real yields, oil prices, and domestic policy credibility. Higher oil helps exporters. It raises pressures on importers. Rising US real yields challenge high-beta currencies. Central bank credibility gives investors confidence that carry will not be erased by depreciation.
Kevin, thank you so much for joining us today.
Thank you Johnny. Have a good one.
