- All 19 Federal Reserve officials supported September’s quarter-point increase to a 3.75% to 4% range, the first hike since July 2023, according to minutes of the September 15-16 meeting. Most participants assessed that another increase would likely be appropriate by year end.
- Several participants said the current policy rate, before the September move, was not restrictive or only mildly restrictive, and several commented that underlying momentum in the economy appeared to have increased.
- Many officials said that despite the rise in longer-term Treasury yields, financial conditions appeared supportive of economic growth, citing substantially higher equity prices this year and corporate bond spreads that have remained narrow.
- Markets have moved the other way since. Investors on Wednesday priced roughly a 20% chance of a quarter-point increase at the October 27-28 meeting, down from around 70% immediately after September, with two-year yields falling more than 10 basis points over the past week to near 4.8%.
What Happened?
Chairman Kevin Warsh said after the September decision that the move removed a dose of accommodation while inflation remained stubbornly high, comments that fuelled expectations of another increase in October. President Trump criticised the decision and blamed Warsh’s colleagues, whom he described as very political. Since the meeting, Vice Chair Philip Jefferson and New York Fed President John Williams have each said the central bank has time to assess the economy before considering another increase, which prompted investors to scale back expectations. Officials continue to warn inflation is too high, and consumer price data due October 14 could revive calls for a near-term move. Three officials who dissented against holding steady in July could dissent again if the majority votes to leave rates unchanged this month.
Why It Matters?
The financial conditions passage is the most consequential thing in these minutes and it should change how investors read equity strength. Officials cited high share prices and narrow credit spreads as evidence that conditions remain supportive of growth, which in the Fed’s framework means policy is not yet tight enough. A rising stock market is therefore an argument for more tightening rather than a vindication of the current stance. Anyone treating record index levels as a bullish signal should understand that the central bank reads the same data as unfinished business, and that the relationship is self-correcting in an uncomfortable way: the further equities run, the stronger the case for the rate increases that would eventually stop them. The minutes are also already stale, which is itself instructive about how policy is communicated now. A documented majority expecting another hike by year end has been overridden in market pricing by two speeches from senior officials, taking October odds from 70% to 20%. The minutes describe where the committee stood three weeks ago; Jefferson and Williams describe where it stands today. The curve shape supports a point running through recent data. With the two-year near 4.8%, the 10-year at 5.28% and the 30-year at 5.66%, the spread between short and long maturities has widened considerably, which means the long end is being driven by term premium, deficits and inflation risk rather than by expectations of further policy tightening. That is consistent with policy expectations easing while long yields set new highs, and it means rate cuts would not automatically pull long rates down. On the substance, the assessment that policy was not restrictive at 3.75% to 4% implies officials place neutral higher than many models assume, which fits market pricing of a 4.5% to 4.75% range by June 2027.
What Next?
Consumer price data on October 14 is the decisive input, and the ISM services prices paid gauge reaching 74, its highest since July 2022, argues for the hawkish reading. The October 27-28 meeting follows, where a hold would likely draw dissents from the three officials who objected in July. Watch whether other officials align with Jefferson and Williams or with the year-end expectation recorded in the minutes, since the gap between the two is currently where the policy path is being decided. For markets, the question is whether equity strength continues to be cited as justification for tightening, which would make the rally partly self-limiting.
Affected Tickers and Coins: ZT, ZN, ZB
Source: Bloomberg
