Fed minutes indicate one more rate hike followed by prolonged higher interest rates.
Newly released records of discussions among Federal Reserve policymakers reveal their expectations for one more interest rate hike before holding rates high for “some time.” However, recent surges in long-term Treasury yields may have altered their plans.
Minutes from the central bank’s most recent September meeting of the rate-setting Federal Open Market Committee (FOMC), released on Oct. 11, indicate that a “majority” of officials believe that one more rate hike “would likely be appropriate” to bring inflation closer to the Fed’s 2 percent target.
During the meeting, FOMC members decided to maintain rates within a range of 5.25-5.5 percent—the highest level in 22 years.
By contrast, “some judged it likely that no further increases would be warranted,” the minutes read, aligning closely with market expectations that put the odds of another pause at the FOMC’s next meeting in November at over 90 percent.
Prior to the release of the minutes, a recent surge in longer-dated U.S. Treasurys—which made government borrowing more expensive—led several Fed officials to suggest that the central bank may keep rates unchanged in November.
Bond Surge in Focus
Since late July, the yield on the benchmark 10-year Treasury note has risen from around 4 percent to approximately 4.8 percent, reaching a 16-year high.
Mortgage rates, closely tied to the 10-year Treasury yield, have reached 7.5 percent, a 23-year high, according to Freddie Mac.
Corporate bond yields have also increased, resulting in higher borrowing costs for businesses.
In a speech to the National Association for Business Economics (NABE), Philip Jefferson, vice chair of the Fed’s board, emphasized the impact of higher bond rates on future policy decisions.
Lorie Logan, president of the Federal Reserve Bank of Dallas and a voting member of FOMC, stated that market movements in long-term bond rates would tighten financial conditions and potentially eliminate the need for another rate hike.
Atlanta Federal Reserve Bank President Raphael Bostic expressed his belief that further interest rate increases are unnecessary, citing the already restrictive monetary policy and the yet-to-be-felt effects of previous rate hikes.
The minutes from the Fed’s latest meeting indicated that all higher interest rates.”>rate-setting committee members agreed on the need for a restrictive policy for the foreseeable future, with a potential adjustment only when inflation is sustainably moving towards the 2 percent target.
“A few participants noted that the pace at which inflation was returning to the Committee’s 2 percent goal would influence their views of the sufficiently restrictive level of the policy rate and how long to keep policy restrictive,” the minutes read.
Following the release of the minutes, Wall Street’s major indexes experienced a volatile trading session but ultimately closed higher.
Inflation Reaccelerates
The latest price data reveals an acceleration in inflation, with a year-over-year increase of 3.7 percent in August, up from 3.2 percent the previous month. Month-over-month, prices rose by 0.6 percent, compared to 0.2 percent in the prior month.
Upcoming inflation data, scheduled for release on Oct. 12, is eagerly anticipated by the markets.
The Federal Reserve Bank of Cleveland’s Inflation Nowcasting predicts that September’s inflation will match the 3.7 percent pace of August, with a month-over-month increase of 0.4 percent.
Producer price data released on Oct. 11 indicates a year-over-year business cost inflation of 2.2 percent, up from 2.0 percent the previous month. This serves as a precursor to consumer inflation.
Mark Hamrick, senior economic analyst at Bankrate, expects the upcoming inflation data to show a possible modest easing from August’s 3.7 percent increase, but still falling short of the Federal Reserve’s 2 percent target.
“For consumers trying to manage their personal finances amid inflation, the situation with prices is a bit like battling illness. Being past the worst of it isn’t the same as feeling better or robust,” he added.
Waning Consumer Confidence
In September, consumer confidence reached a four-month low for the second consecutive month, according to the Conference Board.
Expectations regarding the economic outlook over the next six months fell below the Conference Board’s recession threshold of 80, reflecting declining confidence in business conditions, job availability, and earnings.
Dana Peterson, chief economist at the Conference Board, highlighted rising prices, particularly for groceries and gasoline, as well as concerns about the political situation and higher interest rates, as factors affecting consumer sentiment.
Former Walmart CEO Bill Simon echoed these concerns, stating that political polarization, inflation, and high interest rates were undermining consumer confidence and spending.
Consumer spending plays a crucial role in the U.S. economy, accounting for approximately two-thirds of gross domestic product.
What are the factors influencing the potential pause in interest rate hikes by policymakers?
Gh. This increase in long-term Treasury yields has raised concerns among policymakers, as it could have a negative impact on borrowing costs for businesses and consumers.
The minutes released from the FOMC’s September meeting indicate that a “majority” of officials believe that one more interest rate hike would be appropriate to bring inflation closer to the Federal Reserve’s target of 2 percent. However, there are some officials who believe that no further increases would be necessary.
Market expectations align with the latter view, with the odds of another rate hike at the FOMC’s next meeting in November estimated to be over 90 percent. This suggests that policymakers may pause their rate hike cycle in light of recent bond surges.
One of the factors influencing this potential pause is the surge in longer-dated U.S. Treasurys. The yield on the benchmark 10-year Treasury note has risen significantly since late July, reaching a 16-year high of approximately 4.8 percent. This increase in yields has made government borrowing more expensive, prompting some Fed officials to suggest keeping rates unchanged in November.
The impact of this bond surge extends beyond government borrowing costs. Mortgage rates, which are closely tied to the 10-year Treasury yield, have also increased to a 23-year high of 7.5 percent. This presents a challenge for prospective homebuyers and homeowners looking to refinance their mortgages.
The Federal Reserve is closely monitoring these developments and their potential implications for the economy. If borrowing costs continue to rise, it could slow down economic activity and dampen inflationary pressures. By pausing their rate hike cycle, policymakers may be aiming to mitigate these risks and ensure steady economic growth.
It is important to note that the Federal Reserve’s decision on interest rates is data-dependent and will be influenced by economic indicators and trends. As such, any changes in the trajectory of long-term Treasury yields and its impact on borrowing costs will shape the central bank’s future decisions.
Overall, the newly released records of discussions among Federal Reserve policymakers provide insight into their expectations for one more interest rate hike before potentially pausing. The recent surge in long-term Treasury yields has raised concerns and may have altered their plans. As the Federal Reserve continues to navigate the path of monetary policy, its decisions will have implications for borrowing costs, economic growth, and inflation.
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