FOMC Minutes Highlight Uncertain Path Forward

Yields close largely unchanged despite FOMC minutes. UST yields declined 1-3 bps overnight but grinded higher throughout the remainder of the session, with the reversal partially driven by weak demand at today’s $39B 10-year auction. Soon after, September FOMC meeting minutes were released, but the generally mixed tone among policy voters had little impact on rates. Ultimately, the 2-year yield closed ~2 bps higher at 3.58% and the 10-year down 1bp to 4.12%. Meanwhile, the rally in equities resumed after yesterday’s pause, with the S&P 500 and NASDAQ closing 0.58% and 1.12% higher, respectively.

FOMC minutes illustrate a shifting balance of risks. September FOMC meeting minutes released today highlighted the difficult road ahead for the Fed, which is balancing inflationary pressures and a weakening labor market. While most members “judged that it likely would be appropriate to ease policy further over the remainder of this year,” many expressed concern about near term tariff-related inflation risks, with 7 of 19 members projecting no additional rate cuts in 2025. However, concerns about inflation are mostly geared toward the short-term, and the minutes noted that most members expect inflation to return to the Fed’s 2% target by 2027.

On the other side of the Fed’s mandate, today’s minutes noted members’ uncertainty about the labor market outlook. While most expect labor market conditions to ultimately be little changed or soften modestly with “appropriate monetary policy,” they “viewed downside risks to employment as having increased over the intermeeting period.” Overall, the minutes highlighted the FOMC’s renewed focus on a deteriorating labor market, even as near-term inflationary pressures remain.

New US demands undercut recent US – EU trade agreement. Earlier this month, the Trump Administration sent the EU a new proposal to achieve “fair and balanced” trade. While specifics of the new US demands were kept private as EU member states are being briefed on the discussions, people familiar with the matter say EU officials view many of components of the request as undercutting the recently agreed upon US – EU trade agreement. In a statement today, European Commission spokesperson Olof Gill said, “We are currently focused on the faithful implementation of the EU – US joint statement, which is essential to preserving our unmatched transatlantic trade, protecting businesses and safeguarding jobs.” The new US proposal comes as the two sides aim to finalize other details of their recent trade deal, which set a broad 15% tariff on EU exports to the US.