Fed to Cut Rate-Setting Meetings from 8 to 6... Holds Rates Steady Despite Strong Growth and High Inflation (Comprehensive)

Held rates steady at 3.75%-4.00% a year
Two dissenters: Cook and Hammack favor a rate hike
Economic outlook upgraded to "expanding at a strong pace"
Inflation and employment assessments unchanged from September

The U.S. Federal Reserve (Fed), which held its benchmark interest rate target range steady at 3.75%-4.00% at the October Federal Open Market Committee (FOMC) meeting, decided to reduce the number of rate-setting meetings from the current eight per year to six by 2028. The move is intended to give policymakers more economic data to review between rate-setting meetings so they can closely assess the effects of the artificial intelligence (AI) investment boom and productivity changes on inflation and growth.

Markets initially interpreted the upgrade to the economic outlook and two dissenting votes in favor of a rate hike as hawkish. But after Fed Chair Kevin Warsh gave no clear signal of further rate increases, they viewed his press conference as less hawkish than expected. U.S. short-term Treasury yields fell, while long-term Treasury yields rose.

Fed to Cut Rate-Setting Meetings from 8 to 6... 2-Year Treasury Yield and Dollar Fall

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At a press conference following the regular October FOMC meeting on Oct. 28 local time, Fed Chair Kevin Warsh said that in 2027, one of the year's FOMC meetings would focus solely on discussing monetary policy strategy, without a rate vote or a policy statement. This would reduce the number of rate-setting meetings from eight to seven per year.

In 2028, the Fed plans to hold two strategy meetings, reducing the number of rate-setting meetings to six. However, the total number of FOMC meetings, including strategy meetings, will remain at eight per year.

“To make policy well, we need to assess short-term economic conditions at timely, regular, and information-rich intervals,” Warsh said. “But it is also important to have the time and space to revisit big issues from a long-term perspective.”

“Setting the meeting schedule and agenda is not a mere administrative detail,” he added. “It is an institutional choice that affects the nature and quality of the discussion and, ultimately, the wisdom of policy decisions.”

The U.S. 2-year Treasury yield rose immediately after the Fed held interest rates steady, but gave back its gains after Fed Chair Kevin Warsh said the number of rate-setting meetings would be reduced. Investing.com

Warsh first proposed reducing the number of rate-setting meetings from eight to six per year at the FOMC meeting last July. The aim was to improve the quality of monetary policy decisions by reviewing more economic data and information between meetings.

Markets initially interpreted the upgraded economic outlook and two dissenting votes in favor of a rate hike in the FOMC statement as hawkish signals. The U.S. 2-year Treasury yield, which is sensitive to monetary policy, rose by as much as 5 basis points (1 bp = 0.01 percentage point) immediately after the statement was released.

However, after Warsh gave no clear signal of further rate increases and announced plans to reduce the number of rate-setting meetings, the yield gave back all its gains and fell by as much as 4 basis points to 4.70% per year.

“The market started to move when Warsh mentioned changing the meeting schedule,” said Steve Englander, global head of G10 FX research at Standard Chartered Bank. “The market interpreted it as a dovish measure.”

Long-term Treasury yields, however, held at levels about 5 basis points higher, and expectations for a rate hike in December were unchanged. Interest rate futures reflected an 84.8% probability of a 0.25-percentage-point increase in the benchmark rate in December. The expected number of additional rate hikes through the first half of next year edged down from 2.8 to 2.6.

Rates Held Steady Despite Strong Economy and High Inflation... Fed to Assess Effects of September Hike 

As markets expected, the Fed held its benchmark interest rate steady at 3.75%-4.00% that day. The decision came six days before the midterm elections on Nov. 3. Last month, the Fed raised its benchmark rate by 0.25 percentage point for the first time in three years and two months.

At this meeting, Fed Governor Lisa Cook and Cleveland Fed President Beth Hammack voted against the decision, saying the benchmark rate should be raised by 0.25 percentage point. At the September meeting, the Fed had raised rates unanimously.

A notable change in the October statement was the Fed's assessment of the U.S. economy. The Fed said in its statement that “economic activity has been expanding at a strong pace.” This marked an upgrade from last month's statement, which said activity had been expanding at a “solid pace.”

Warsh said that first-half real gross domestic product (GDP) growth was revised up from an initial 1.8% to 2.4%, and that third-quarter growth could exceed 3%.

The Fed's assessment of inflation was unchanged from September, describing it as “still elevated.” Its view that uncertainty remained high, partly due to geopolitical conditions, was also unchanged. The assessment of employment was unchanged as well. The Fed said the unemployment rate had changed little, while the pace of job growth remained in line with labor force growth.

Changes in financial conditions following the September rate hike were cited as a reason the Fed held rates steady. “Financial and credit conditions for some businesses and households have begun to tighten as expected,” Warsh said, adding that “market participants are also becoming more selective in allocating capital.” However, he added that “overall financial conditions have tightened from before, but we cannot call them ‘tight.’”

The Financial Times (FT) said the Fed held rates steady as a sharp rise in energy prices due to the war in Iran drove up prices across the U.S. economy and the AI investment boom fueled concerns about overheating.

Warsh stressed at the press conference that the decision to hold rates steady was made regardless of political considerations. However, the FT reported that some economists said the timing, just before the midterm elections, may have weighed on committee members' decision to raise rates further.

This content was produced with the assistance of AI translation services.