FOMC Watch - Rates on hold, rate-setting meetings cut
The Fed's FOMC kept the target range for the federal funds rate at 3.75-4.00%. Hammack and Cook dissented in favour of a hike. Two other potential dissenters, Logan and Kashkari, chose not to dissent, possibly because they expect a hike in December. The committee gave no clear signal of a December hike, but kept the option open. The post-meeting statement was marginally longer than usual. It added: ‘The accumulation of more information will help the committee determine the policy stance appropriate to ensure a timely return of inflation to the committee’s 2% goal.’ This appeared to satisfy markets as an explanation for today’s inaction.
In his opening statement, Warsh noted that recent data pointed to healthy consumer spending and solid business investment, so the discussion centred on inflation. The CPI rose at its fastest pace in five months in September, predominantly due to energy prices. He noted that financial conditions had tightened, but that he still would not describe them as tight. His tone on inflation was generally quite hawkish: he repeatedly emphasised that it was above target and vowed to deliver price stability, saying ‘there’s nothing soft about the Fed’s 2% target’.
The biggest announcement concerned the format of FOMC meetings. During the briefing, Warsh announced that the committee will continue to hold eight meetings per year, but that one will involve neither a vote on rates nor a statement. He expected that, by 2028, two meetings would follow this format, focusing on broader economic discussions rather than rate setting. The absence of a formal statement is surprising, as is the announcement of this change before the communication task force has delivered its official findings.
Warsh also made some interesting remarks on AI. He pushed back against the idea that hyperscalers are unaffected by borrowing costs, arguing that interest rates ‘get in the cracks’ across the economy. He said he believes productivity has increased, although the gains predate AI. Warsh has been a vocal proponent of AI’s productivity and disinflationary effects, making this a somewhat milder assessment.
Overall, we think this meeting left the door wide open for a December hike, which remains our base case. It also reaffirmed that the committee believes it has time on its side to assess incoming data carefully, rather than raise rates rapidly in response to accelerating inflation. Inflation expectations remain anchored and second-round effects are limited. The FOMC will have substantially more data available for its December decision, including Q3 growth, two more labour market reports, October inflation figures and perhaps a pre-release November CPI print. Barring positive geopolitical developments, we think the data will provide sufficient reason for the Fed to deliver another insurance hike, reversing some of last year’s easing.