Fed Officials Debate Policy Path Forward

Yields decline as markets digest Fed path forward. Treasury yields traded in a 3-4 bp range for most of the session as markets continue to digest Chair Powell’s hawkish FOMC press conference alongside mixed commentary from Fed officials today. Yields declined ~2 bps in the final hour of the day, with the 2-year yield closing 3 bps lower at 3.57% and the 10-year yield 2 bps lower at 4.08%, both a 8-9 bp increase on the week. Meanwhile, equities rose today, with the S&P 500 and NASDAQ climbing 0.26% and 0.61%, respectively, driven by positive earnings outlooks from Amazon and Apple.

Fed officials have mixed opinions on recent rate cut and outlook. Following the Fed’s 25 bp rate cut earlier this week, several Fed officials voiced differing views on the decision and path ahead. Dallas Fed President Lorie Logan, Cleveland Fed President Beth Hammack, and Kansas City Fed President Jeff Schmid all preferred to leave rates unchanged. Schmid, a FOMC voter, stated, “By my assessment, the labor market is largely in balance, the economy shows continued momentum, and inflation remains too high.” Logan echoed this, saying she “did not see a need to cut rates this week,” while Hammack described the new benchmark rate as neutral but emphasized that policy should stay restrictive to control inflation. In contrast, Atlanta Fed President Raphael Bostic supported the cut, citing his view that the current rate is still restrictive. Fed Governor Christopher Waller backed further easing, saying “We know inflation is going to come back down, so this is why I’m still advocating that we cut policy rates in December, because that’s what all the data is telling me to do.”

Euro-Zone inflation falls slightly as ECB holds rates. Eurozone inflation eased slightly in October, coming in right around 2%, though just above the ECB’s official target. The figures showed consumer prices rose 2.1% from last October but declined slightly from September’s 2.2%. A measure of underlying inflation that excludes volatile items such as food and energy held steady at 2.4%, but the services component rose to 3.4%. The ECB continues to project that inflation will fall below its 2% goal next year, and these latest inflation figures support the central bank’s decision to keep interest rates unchanged at 2% for the third consecutive meeting. Reflecting this concern, Joerg Krämer, Chief Economist at Commerzbank, stated that “the persistent underlying inflation argues against the ECB lowering its key interest rates.”