Federal Reserve Chairman Kevin Warsh doesn’t want to tell Wall Street what the Fed will do next.

But this week, two of his top deputies did just that anyway.

Inflation was still running too high, and investors quickly began betting that another rate hike would come in October.

Bond yields climbed.

Markets put the chance of another October hike at around 70%.

Then New York Fed President John Williams spoke.

He said another rate hike may eventually be needed.

But there was “no urgency” to do it now.

Then Fed Vice Chair Philip Jefferson delivered a similar message.

Bloomberg reported that the two officials effectively pushed back against expectations for an immediate October hike.

Wall Street got the message.

Expectations for an October hike fell sharply.

That is important because Warsh has said he wants to move away from “forward guidance.”

Forward guidance sounds complicated.

It isn’t.

It basically means the Fed tells markets what it is thinking about doing next.

Warsh doesn’t want to do much of that.

But this week showed how difficult it can be to stop.

When markets began expecting another hike, Williams and Jefferson stepped in.

They didn’t promise anything.

They simply told investors the Fed wasn’t in a hurry.

It was forward guidance, through the back door.

WHY INTEREST RATES MATTER

There is an old way of thinking about interest rates that makes this much easier to understand.

Interest rates act like gravity on asset prices.

Imagine a safe government bond pays almost nothing.

If you want to make money, you have more reason to buy stocks, businesses, or real estate.

Now imagine that same safe government debt pays 5%.

Suddenly, an investor can earn a greater return without taking nearly as much risk.

Everything else in the economy has to compete with that.

Plus, borrowing money becomes more expensive.

The stronger that gravity gets, in the most basic terms, the harder it can become for asset prices to rise.

That is why Wall Street cares so much about every word coming from the Federal Reserve.

But don’t confuse talk with rates.

Investors can spend all day guessing what the Fed will do next.

But they are still guessing.

For most investors, the better approach is to value businesses based on what can reasonably be known.

After all, building an investment case around precise predictions about an unknowable future has not produced most of the great fortunes of the world.

But to invest effectively, you have to keep an eye on both.

Investing is ultimately about individual businesses.

But every business operates inside a larger economy.

You don’t have to predict exactly what the Fed will do next.

You do have to understand the economic conditions your investment will have to live in.