September FOMC Minutes Reveal Divisions Over Additional Interest Rate Hikes Within the Year

It has been confirmed that opinions were divided over whether to raise interest rates further within the year at last month's Federal Open Market Committee (FOMC) meeting, where the benchmark interest rate was held steady. While the majority of FOMC members supported one more rate hike, there were also arguments that no further increases were necessary. Amid this, the market is analyzing that the recent sharp rise in long-term Treasury yields could tighten financial conditions further and potentially substitute for the Fed's rate hikes.

[Image source=Reuters Yonhap News]

According to the minutes of the September FOMC meeting released by the Fed on the 11th (local time), most participants judged that it would be appropriate to raise the federal funds rate target once more at upcoming meetings, but some stated that no further hikes were needed.

Earlier, the Fed held the U.S. interest rate steady at 5.25-5.5% as expected at last month's FOMC. Additionally, the year-end interest rate forecast (median) remained unchanged at 5.6%, signaling that one more hike is expected within the year. Looking at the dot plot reflecting individual members' rate forecasts, about two-thirds supported one more hike within the year.

However, they agreed that the monetary policy stance should remain restrictive until they are confident that inflation is declining toward the 2% target. The reason for the upward revision of the median rate forecast for the end of next year and the year after in the September dot plot lies here. This signals that even after the rate hike cycle ends, the era of high interest rates will be prolonged.

Considering the cumulative effects of tightening, participants decided to proceed cautiously based on new data as it becomes available rather than following a predetermined path. The minutes stated, "All participants judged it important to maintain a sufficiently restrictive monetary policy stance to achieve the 2% inflation target," and added, "The Committee is in a position to proceed cautiously." They further noted, "The focus of rate decisions and public communication should shift from 'how much to raise policy rates' to 'how long to maintain policy rates at restrictive levels.'"

Uncertainty about the economic outlook was also pointed out. Participants noted that while the U.S. economy is showing stronger-than-expected performance, factors such as expanded auto union strikes and rising oil prices could fuel inflation and negatively impact the economy. Concerns were also raised about global growth weakening due to China's economic slowdown and the possibility of a U.S. federal government shutdown. Additionally, it was mentioned that some households are under pressure due to high inflation and depletion of additional savings, leading to increased reliance on credit spending.

The minutes stated, "The majority of participants judged the future path of the economy to be highly uncertain," and "many cited data volatility and difficulties in estimating the neutral rate as reasons for cautious future monetary policy decisions." Furthermore, "Participants judged that as monetary policy enters a generally restrictive range, the risks to achieving the target have become more two-sided," emphasizing that "with inflation still above the long-term target and the labor market remaining tight, most participants are concerned about inflation risks."

While the division of opinions within the Fed over additional hikes this year was confirmed, the market is closely watching the recent sharp rise in long-term Treasury yields. The rise in long-term Treasury yields began in earnest in August and accelerated further after the September FOMC. The Wall Street Journal (WSJ) analyzed, "If this trend continues, the Fed may no longer need to raise rates further this year," adding, "The Fed's earlier indication of one more hike within the year in the dot plot was made before the recent surge in long-term yields."

The background to recent dovish remarks by Fed officials also includes the judgment that the rise in long-term yields could substitute for additional tightening decisions. Fed Governor Christopher Waller said at a Republican event in Utah on the day, "Financial markets are tightening and doing some of the work for us," adding, "We are watching what happens with interest rates." Earlier, Fed Vice Chair Philip Jefferson and Raphael Bostic, President of the Federal Reserve Bank of Atlanta, also expressed cautious views on further rate hikes.

Following the release of the FOMC minutes, the market's expectation for a rate hold in November has strengthened. According to the Chicago Mercantile Exchange (CME) FedWatch tool, as of the afternoon, the federal funds futures market reflects over a 91% probability that the Fed will hold rates steady in November, up from about 84% in the morning. The probability of a baby step (0.25 percentage point rate hike) has fallen to single digits. The forecast for a hold at the last FOMC meeting of the year in December stands at around 72%. Given the already sharp rise in long-term Treasury yields and the added uncertainty from Middle East developments, the prevailing analysis is that the Fed will not continue tightening.

In the New York bond market on the day, the benchmark 10-year U.S. Treasury yield fell to around 4.57%, down from the previous session. The 30-year yield is hovering around 4.71%. This decline is interpreted as a result of increased demand for safe assets following the surprise attack by the Palestinian militant group Hamas on Israel. Although the 10-year yield is lower than last week’s peak?the highest since 2007?it remains significantly higher compared to 4.346% on September 20, when the September FOMC was held, and 3.85% on July 26, when the last rate hike was implemented.

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