“Many participants suggested that … it would likely be appropriate to keep the target range unchanged for the rest of the year”: FOMC minutes.

By Wolf Richter for WOLF STREET.

The minutes of the FOMC’s October meeting, released today, made official what a majority of Fed speakers have been saying for weeks: Unless the data changes drastically, there is not much chance of a December rate cut, and the Treasury market adjusted to it:

The 6-month Treasury yield rose by 2 basis points today and closed at 3.83%, well within the Fed’s current target range of 3.75% to 4.0% (shaded area). Just before the Fed’s October rate cut, it had dropped to 3.75% on a downward trajectory to price in the next rate cut in December, but then it reversed.

Traders and algos scrutinize everything that the Fed publishes, such as these minutes, and everything Fed speakers say in their speeches, and they trade accordingly. As a result, the 6-month Treasury yield reacts to expectations of the Fed’s policy rates over the next two or so months and is a good indicator where the Treasury market thinks the Fed’s policy rates will be within its two-month-plus window. And now, with the yield in the Fed’s target range, it predicts no change in December, and little chance of a rate cut at the January 27-28 meeting

The Fed’s FOMC is deeply divided, but with a majority on the side of likely no cut in December, while some members have been advocating for a cut:

“Most participants noted that, against a backdrop of elevated inflation readings and a very gradual cooling of labor market conditions, further policy rate reductions could add to the risk of higher inflation becoming entrenched or could be misinterpreted as implying a lack of policymaker commitment to the 2 percent inflation objective.”

“Many participants” expressed concerns that “overall inflation had been above target for some time and had shown little sign of returning sustainably to the 2 percent objective in a timely manner.”

The minutes depict a deeply divided FOMC, amid strong concerns about persistent and rising inflation and also strong concerns about a slowly cooling labor market, despite “solid” economic growth – and they fingered AI and automation, along with reduced immigration, among the factors for this combination of slow hiring but few layoffs amid solid economic growth:

“Participants generally attributed the slowdown in job creation to both reduced labor supply—stemming from lower immigration and labor force participation—and less labor demand amid moderate economic growth and elevated uncertainty. Many participants remarked that structural factors such as investment related to AI and other productivity-enhancing technologies may be contributing to softer labor demand.”

And the minutes reported on the stark division during the October meeting – apparently not even that October rate cut was an easy call:

“Many participants observed that the divergence between solid economic growth and weak job creation created a particularly challenging environment for policy decisions, requiring careful monitoring of incoming data to distinguish between cyclical weakness and structural changes in the relationship between output and employment.”

Amid upside risks to inflation and upside risks to unemployment, “many participants were in favor of lowering the target range for the federal funds rate at this [October] meeting, some supported such a decision but could have also supported maintaining the level of the target range, and several were against lowering the target range.”

Lots of disagreements even about the October cut:

“Those who preferred to keep the target range for the federal funds rate unchanged at this meeting expressed concern that progress toward the Committee’s inflation objective had stalled this year, as inflation readings increased, or that more confidence was needed that inflation was on a course toward the Committee’s 2 percent objective, while also noting that longer-term inflation expectations could rise should inflation not return to 2 percent in a timely manner.”

And about that December meeting:

“Many participants suggested that, under their economic outlooks, it would likely be appropriate to keep the target range unchanged for the rest of the year.”

So unless data shows some big changes until the December meeting, the majority of the FOMC members are in no mood to cut, in face of their concerns about persistent and rising inflation.

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WOLF STREET FEATURE: Daily Market Insights by Chris Vermeulen, Chief Investment Officer, TheTechnicalTraders.com.