A divided Federal Reserve left interest rates unchanged Wednesday despite elevated inflation, choosing to wait for more data before taking additional action.
Fed Governor Lisa Cook and Cleveland Fed President Beth Hammack both dissented in favor of raising rates by a quarter percentage point amid concerns that the current policy stance is not restrictive enough to tame inflation, which has accelerated in recent months.
With at least one more hike widely expected this cycle, the question now is how soon the Fed will move again, and how far it is willing to go to secure price stability amid signs the labor market is softening.
Schwab expects two more rate hikes this cycle, depending on the pace and breadth of inflation.
Stocks had a muted reaction to the Fed decision. Treasury yields were also mostly unchanged, although the yield curve steepened. The closely watched 10-year Treasury yield continues to hover around 5%.
Fed upgrades view of economic growth
The Fed's policy statement was brief and mostly unchanged from September. However, officials said that economic activity is now expanding at a "strong" pace, an upgrade from a "solid" pace a month earlier.
Policymakers also reiterated their commitment to price stability but added that they will be looking ahead to new information as they determine the policy path moving forward. That suggests the Fed is comfortable being patient.
"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 percent goal," the statement read. "The Committee will deliver price stability." References to productivity growth being "strong," capital investment being "robust," and job gains "keeping pace with the workforce" went unchanged.
The central bank didn't release any new economic or interest rate projections Wednesday, leaving investors looking ahead to December's meeting for updates. In September, the Fed's "dot plot" of interest rate projections showed a majority of policymakers expected their target range to rise by year-end. If those projections haven't changed, they imply another rate hike could be coming in December.
See more: Holding the Line
An optimistic press conference
In his press conference, Fed chair Kevin Warsh once again emphasized the central bank's commitment to taming inflation.
"Americans, of course, are still dealing with inflation that has been running above the committee's objective for close to six years. It's our responsibility to get inflation down," he told reporters.
However, the Fed chair struck a new, more optimistic tone when discussing the path of inflation moving forward. "I feel good about the sign posts," he said. "I'm encouraged—we haven't achieved price stability but we're working on it."
Warsh also said the labor market remains in good shape and noted that consumer spending has proven resilient. He wasn't willing to call current financial conditions tight, however, potentially signaling room for additional rate hikes if inflation continues to run hot. In a sign the Fed remains divided, Warsh also described the latest meeting as a "heck of a family fight—a serious, sober discussion."
The Fed chair then announced a change to the central bank's meeting schedule. There will still be eight Fed meetings each year, but in 2027, one meeting will focus only on broad strategy, meaning no policy announcements at that meeting. By 2028, the number of policy-setting meetings will drop to just six, with two strategy-only meetings.
When asked about the format of these new strategy-only meetings, Warsh said the details are still being worked out. "There's more news to come on that. The decision on the new format for the meetings is relatively new," he explained.
Immediately after Warsh's press conference, futures trading priced in an 83% chance of a hike in December, according to the FedWatch Tool, down from a roughly 87% chance on Wednesday morning.
Pressure from hot inflation reports
Expectations of a rate hike at Wednesday's meeting have plummeted in recent weeks as multiple Fed officials called for a patient approach. The CME FedWatch Tool showed just a 7.2% chance of a hike as of Wednesday morning, down sharply from 64.2% a month ago. Elevated Treasury yields have also tightened financial conditions without the need for Fed action.
However, the Fed has also faced multiple hotter-than-expected inflation reports in recent weeks.
The Consumer Price Index (CPI) rose 3.7% from a year earlier in September, up from 3.4% in August. Although the increase was driven in part by surging oil prices, core CPI—which excludes more volatile food and energy prices—accelerated to 2.6% as well, showing price pressures remain relatively broad based. The three-month annualized rate for core CPI hit 3.4% in September.
September's Producer Price Index (PPI) also blew past estimates, surging 6.3% from a year ago, while core PPI advanced 5%. Higher wholesale and producer costs could be passed onto consumers moving forward.
Meanwhile, the labor market has shown signs of softening in recent months. Employers added only 29,000 jobs in September, far less than anticipated, leading the unemployment rate to rise to 4.2%. However, jobless claims approached a 57-year low last week, showing the "low hire, low fire" environment continues for now.
Any upside surprises in inflation or labor market data could make a December rate hike more likely. The next data releases come tomorrow, with the Personal Consumption Expenditures (PCE) price index for September and the first estimate of third-quarter economic growth. October's jobs report will be in focus on November 6.
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