Analysis
Two Fed Officials Wanted a Hike as Rates Were Held
The Fed held rates at 3.75% to 4% on Wednesday, but Governor Lisa Cook and Cleveland Fed President Beth Hammack voted for a quarter-point hike. Chair Kevin Warsh gave no guidance on December and said one 2027 meeting will be about strategy, not rates.
The decision surprised no one; the vote did. The Federal Open Market Committee left the federal funds target range at 3.75% to 4.00% on Wednesday, October 28, a month after its first increase since 2023, with 10 votes in favour and 2 against. Governor Lisa Cook and Cleveland Fed President Beth Hammack dissented because they wanted to raise the range by a quarter point at this meeting. Before the meeting, 94 of 100 economists polled by Reuters had expected no change, and futures had put the chance of a hike this week at about 10%.
The statement's description of the economy leaned hawkish. Activity was expanding at a strong pace, it said, with domestic spending holding up despite elevated uncertainty linked partly to geopolitical developments, strong productivity growth, robust capital investment and job gains keeping pace with the workforce. Inflation "remains elevated", and gathering more information will help the committee set the stance needed to return it to 2% in a timely way. "The Committee will deliver price stability," it added. The interest rate paid on reserve balances stayed at 3.90%.
Chair Kevin Warsh declined to say what comes next. "I don't believe in forward guidance, absent exigent circumstances, absent a crisis," he said, as reported by CNBC, while noting that inflation has run above the Fed's objective for close to six years and that energy prices had risen again. His main announcement was about the calendar: from 2027 one of the FOMC's eight annual meetings will be devoted to strategy, with no rate decision or statement, so officials will vote on rates seven times next year and six times in 2028. "We believe eight meetings per year is the right number for the FOMC," he said.
Traders read fewer rate meetings as a slightly dovish signal. The 2-year Treasury yield, which had risen as much as five basis points after the statement, fell as much as four basis points to about 4.70% during the press conference, The Asia Business Daily reported, and the dollar gave up its gains, while longer yields kept rising: the 10-year ended just above 5%. The S&P 500 rose 0.28% to 7,743.98, the Dow 0.19% and the Nasdaq 0.27%, and the VIX slipped below 17. Futures still priced a December increase as the more likely outcome.
Two dissents in favour of tighter policy, at a meeting where no move was expected, are a message to markets as much as to colleagues: the bar for December is low. The data before then are heavy, with third-quarter GDP and September PCE inflation on Thursday, the October jobs report on November 6 and consumer prices on November 10. The Bank of Canada, which raised its rate to 2.5% the same morning, blamed oil prices it expects to stay higher for longer; with Brent above $115, the Fed is facing the same problem in a larger economy.