Fed Cuts Rate-Setting Meetings from 8 to 6... Holds Rates Steady Despite Strong Economy and High Inflation (2nd Update)

Rates Held Steady at 3.75%-4.00% a Year
Two Dissenters... Cook and Hammack Oppose Decision
Growth Assessment Upgraded to "Expanding at a Strong Pace"
Inflation, Employment and Other Assessments Unchanged from September

The U.S. Federal Reserve (Fed) will begin holding regular meetings of the Federal Open Market Committee (FOMC) next year that do not include interest rate decisions and focus only on formulating policy strategy. The Fed has held eight meetings a year to decide interest rates, but will cut that number to seven next year and six the year after. Markets appeared to take the decision, along with the Fed's decision to hold rates steady, as a less hawkish signal. U.S. short-term Treasury yields and the dollar fell.

Fed to Cut Rate Decisions from 8 to 6 a Year... U.S. 2-Year Treasury Yield Falls

October FOMC Statement

At a press conference following the October FOMC meeting, Fed Chair Kevin Warsh said on October 28 local time that one of the eight full FOMC meetings next year would be devoted to discussing monetary policy strategy, without a rate vote or policy statement. The year after, the Fed will hold two strategy meetings. As a result, the number of rate-setting meetings will fall to six a year.

Warsh said, "To make sound policy decisions, we need to assess near-term economic conditions at timely, regular and well-informed intervals," but added, "It is also important to have the time and space to reconsider big questions from a long-term perspective."

He added, "Setting the meeting schedule and agenda is not merely an administrative detail," emphasizing that it is "an institutional choice that affects the nature and quality of discussions and, ultimately, the wisdom of policy decisions." He first proposed reducing the number of meetings at the FOMC meeting in July, citing the same rationale.

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

As markets had expected, the Fed held its benchmark interest rate steady at 3.75% to 4.00% a year. In September, the Fed raised rates by 0.25 percentage points for the first time in three years and two months. Markets had expected it to pause at this month's FOMC meeting.

Warsh said the Fed had focused on changes in financial conditions following last month's rate hike. "Financial and credit conditions for some businesses and households have begun to tighten as expected," he said, adding that "market participants are also becoming more selective in allocating capital." However, he emphasized that "overall financial conditions have tightened compared with before, but we cannot call them 'restrictive.'"

In the rate decision vote, Fed Governor Lisa Cook and Beth Hammack, president of the Federal Reserve Bank of Cleveland, voted against holding rates steady, saying the benchmark rate should be raised by 0.25 percentage points.

Fed officials said U.S. economic growth had strengthened further. In a statement released after the FOMC meeting, the committee said that "economic activity has been expanding at a strong pace." Last month, it said activity was expanding at a "solid pace," indicating that growth had strengthened. Warsh said that the estimate for real gross domestic product (GDP) growth in the first half of the year had been revised up from 1.8% to 2.4%, and that growth in the third quarter could exceed 3%.

The Fed described inflation as "still elevated," unchanged from last month. Its assessment that uncertainty remained high, partly due to geopolitical conditions, was also unchanged. The Fed's assessment of employment did not change either: It said the unemployment rate had changed little and that the pace of job growth remained steady.

The Financial Times (FT) said the Fed held rates steady as a surge in energy prices due to the war in Iran pushed up inflation across the U.S. economy, while the AI investment boom heightened concerns about an overheating economy.

FT reported that some economists had suggested the timing, just before the midterm elections, may have weighed on officials' decision to raise rates further. However, Warsh emphasized at the press conference that the decision to hold rates steady was made without regard to political considerations.

The U.S. midterm elections will be held on November 3, six days from now. Following the Fed's decision to hold rates steady, the gap between South Korea's rate of 3.00% and the U.S. rate remained at 1.00 percentage point, based on the upper end of the U.S. target range.

U.S. Long-Term Treasury Yields Hold Steady... Bank of Canada Governor Warns of U.S. Fiscal Risks

Markets appeared to read the FOMC outcome as a signal of monetary easing. With no clear indication of whether rates would be raised at the December FOMC meeting, they seemed relieved that the number of possible rate adjustments would fall starting next year.

After Warsh's announcement, the yield on the 2-year U.S. Treasury, which is sensitive to monetary policy, fell by as much as 4 basis points (1 basis point = 0.01 percentage points) to 4.70% a year.

Steve Englander, global head of G10 FX research at Standard Chartered, said, "The market began to move when Warsh mentioned changing the meeting schedule," adding that "the market interpreted it as a dovish measure."

On the New York Stock Exchange (NYSE), the Dow Jones Industrial Average rose 0.19%, the Standard & Poor's 500 Index gained 0.28%, and the Nasdaq Composite Index advanced 0.27%. The dollar index, which measures the dollar's value against a basket of six major currencies, rose as high as 102.49 during the session but gave up its gains after Warsh's press conference, closing at around 102.13. That was down about 0.2% from the previous day.

However, the yield on the 10-year U.S. Treasury rose by about 5 basis points to around 5.04% a year. Interest rate futures markets priced in an 84.8% probability of a 0.25-percentage-point rate hike in December. Analysts said markets appeared to be under pressure from concerns that the U.S. government's large fiscal deficit would lead to increased Treasury issuance, despite the Fed holding rates steady, as well as expectations that the government's Treasury interest costs could snowball if rates rise in the future.

Bank of Canada Governor Tiff Macklem, whose bank raised its benchmark rate by 0.25 percentage points that day, said in an interview with Bloomberg, "The sustainability of U.S. fiscal policy is concerning," adding that "the current path is not sustainable."

He added, "Canada's financial markets are closely linked to those of the United States, so rising long-term U.S. interest rates also feed through to borrowing costs in Canada." Macklem specifically noted that "the United States has strong growth and relatively low taxes, so it has ample room to reduce its fiscal deficit," adding, "Ultimately, it is a question of political will."

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