Fed Officials Pull Markets Back From an October Rate Increase

Senior Federal Reserve officials spent the week washing away market bets on an October rate increase^1,2. “There is no need for urgency” on changing the current setting of monetary policy, Federal Reserve Bank of New York President John Williams said^1,2.

Vice chair for monetary policy Philip Jefferson echoed those remarks, which were described as dovish and as signalling that the central bank will keep rates on hold in October³. Jefferson said at an event that the Fed may need more time to assess the economy before making additional policy adjustments⁷. Michelle Bowman, the Fed’s vice chair for supervision, struck a similar note, saying she does not currently see an urgent need for further action, and that she sees no urgent need for moves this year⁶.

Why it matters to investors

The remarks moved pricing rather than policy. Williams suggested that additional hikes might wait, and that pulled the odds of an October increase down to 26 per cent⁵. A separate reading put the probability at 23 per cent after Jefferson signalled patience⁴.

The repricing fed straight into the Treasury market. Bond yields retreated suddenly from recent highs as buyers stepped back into Treasuries⁵. Treasuries then traded steady and below multiyear highs while investors waited on jobs data, with Jefferson’s caution about needing more time cited as the reason⁷. For anyone holding duration, that is the second time in a week that official commentary, rather than data, has set the direction of the long end^5,7.

What to watch

The committee is not speaking with one voice. Dallas Fed President Lorie Logan called for “50 bps or more” in rate increases⁸. Logan estimated that at least two further increases of 25 basis points each are needed, and her comments were reported as contrasting directly with Bowman’s⁹.

Minneapolis Fed President Neel Kashkari said on Thursday that he expects additional rate increases, while adding that he is unsure whether the Fed needs to act this month¹⁰. That splits the question in two. For the hawks, October is an argument about timing, because they have already said more tightening is coming^8,9,10. For the officials urging patience, it is an argument about whether anything more is needed at all^1,6. Until one side moves, the near-term path of the policy rate is a reading of the committee rather than a reading of the economy^3,9.