Fed holds rates at 3.75% to 4% in split 10-2 vote
Key Facts
The Federal Reserve kept its target range for the federal funds rate at 3.75% to 4% at its October 28 meeting, with 10 members voting for the decision and two preferring a quarter-percentage-point increase. The split within the committee comes as it said inflation remains elevated while it seeks to return it to its 2% goal. In its statement, the committee said economic activity was expanding at a strong pace and domestic spending had remained solid. It also pointed to continued elevated uncertainty, partly because of geopolitical developments. It said more information would help it determine the appropriate monetary policy stance, without specifying the direction of its next move.
Lisa Cook and Beth Hammack, according to the Fed statement, preferred raising the target range by a quarter percentage point rather than holding it steady. The Fed had cut rates by the same amount in September, bringing the range to 3.75%–4%, in a unanimous 12-0 vote. The October decision therefore kept the range at the level reached after September’s increase, but opposition to another increase emerged at the latest meeting. Comparing the two statements, the committee’s description of economic activity shifted from expanding at a “moderate” pace in September to “strong” in October. Inflation remained elevated in both statements, while the Fed set a 2% goal for returning it to that level over time.
Available price data show persistent inflationary pressure in September: the consumer price index rose 0.6% during the month, following a 0.4% increase in August, and was up 3.7% year over year. Gasoline accounted for more than half of the monthly increase in the overall index, after its price index rose 9.1% in September. The energy index also climbed 5.2% that month. On the activity side, new orders for durable goods totaled $345.4 billion in September, up 1.8% from August. The August reading was revised to a 0.1% increase from July, putting the latest gain in the context of slower growth in the previous month.
Treasury bonds and U.S. stocks moved on decision day, with the picture for the two-year yield differing depending on the measurement time. Reuters said the yield rose 3.9 basis points to 4.776%, while the 10-year yield climbed 5 basis points to 5.047%. In a separate report, the Associated Press said the two-year yield topped 4.79%, compared with Tuesday’s close at 4.70%, before later falling to 4.69% after Warsh said he would wait for conditions to evolve before the next move. The S&P 500 rose 0.3%, the Dow Jones gained 0.2% and the Nasdaq Composite advanced 0.3%. A strategist at Carson Group said a rate hold was widely expected and therefore did not come as a “big surprise.”
Even so, market pricing continued to lean toward another increase, although traders reduced their bets on the number of increases through next summer, according to the Associated Press. Reuters cited data from the CME FedWatch tool showing that the probability of a quarter-point rate increase at the December meeting rose to 86.0% after the decision, from 78.3% on Tuesday. Ryan Detrick said pressure would remain in favor of another increase in December as long as inflation remained a potential problem. These expectations reflect traders’ pricing and analysts’ comments; the Fed has not announced a decision on the December meeting. The committee had said that the accumulation of information would help it determine the appropriate monetary policy stance, linking the future path to its goal of returning inflation to 2%.
Attention first turns to Bureau of Economic Analysis data due on October 29 at 8:30 a.m., including the advance estimate of third-quarter gross domestic product and September personal income and spending data. The Bureau of Labor Statistics has also set November 10 at 8:30 a.m. Eastern time for the release of the October consumer price index. The next Federal Open Market Committee meeting is scheduled for December 8 and 9, with the news conference to be held on December 9. These dates come ahead of the December meeting that traders are watching as they price the possibility of a rate increase. The October statement does not determine the outcome of that meeting; it says the committee needs additional information to assess the appropriate stance.