THE FED HOLDS THE LINE: ONE MORE RATE RISE STILL ON THE TABLE

The minutes from the Fed’s latest meeting delivered few genuine surprises yesterday. There were no dissenters: all 19 participants supported the rate rise, while a majority judged that one further increase in the federal funds target range would probably be appropriate before the end of the year. In other words, September’s tightening may not yet mark the end of the cycle.

The Fed also maintained a relatively firm assessment of the economic outlook. Upside risks to inflation remain elevated, while risks to economic activity are viewed as broadly balanced. At the same time, uncertainty surrounding the outlook remains high, with some policymakers particularly concerned that a prolonged period of above-target inflation could lead to higher inflation expectations becoming increasingly entrenched.

There is some evidence to support those concerns. According to the New York Fed’s consumer survey, inflation expectations have risen to 3.9% — their highest level since 2023. Consumers also expect their own spending to increase by around 5.5%, suggesting households are not yet planning a significant pullback in expenditure. Resilient consumer demand combined with rising inflation expectations is precisely the sort of backdrop that could justify keeping interest rates higher for longer.

The market, however, remains considerably more cautious than the tone of the minutes might suggest. At present, the probability of the Fed leaving rates unchanged at its 28 October meeting stands at around 80.6%. This creates an interesting divergence: policymakers are keeping the door open to another rate rise before year-end, while investors currently see October as an unlikely point for the next move.

That puts the forthcoming inflation data firmly in focus. If CPI shows another acceleration, particularly alongside persistent underlying inflation, markets could quickly begin repricing the probability of an October rate rise. Such an outcome would likely provide further support for Treasury yields and the US dollar, while placing renewed pressure on gold and other assets sensitive to higher borrowing costs.

The bottom line: the minutes did not fundamentally change the market narrative, but they reinforced one important message — the Fed is not yet prepared to declare victory over inflation and remains open to further tightening. The debate now depends less on what policymakers are saying and more on what the data show: if inflation and consumer demand remain resilient, current expectations for an October pause could change very quickly.Trade smart with Headway