In the early hours of Thursday, October 29, Beijing time, the Federal Reserve released its October rate decision, with the Federal Open Market Committee voting 10 to 2 to keep the policy rate unchanged at 3.75%-4%, in line with market expectations.
Manulife Fund believes this FOMC meeting offered limited incremental information, with the monetary policy statement stressing that the U.S. economy is strong and that more data is needed before the next policy step. Fed Chair Warsh noted that since the September rate hike, U.S. financial conditions have tightened marginally and the inflation premium has eased somewhat. This means the Fed can afford to keep watching rather than rushing to act again. Markets hold high expectations for a December rate hike, but there is considerable uncertainty over next year's rate path. Because pricing ahead of the meeting was sufficient, the market reaction was mild; the core driver for U.S. equities remains earnings, and with strong fundamentals combined with a gradual pace of hikes, Treasuries and commodities may stay rangebound.
The Fed left rates unchanged, with significant uncertainty over next year's rate path
This FOMC meeting did not deliver much incremental information. The committee voted 10 to 2 to keep the policy rate at 3.75%-4%, consistent with market expectations beforehand; the dissenting votes came from Fed Governor Lisa Cook and Cleveland Fed President Beth Hammack, both of whom advocated continuing with a 25 basis point hike. The monetary policy statement upgraded its description of recent U.S. economic activity from "solid" to "strong," and expressed a desire to wait for more economic data to inform the next policy decision. In the subsequent press conference, Warsh mentioned that since the September rate hike, U.S. financial conditions have tightened marginally and the inflation premium has eased somewhat, indicating the tightening policy has had some effect. This means the Fed can continue to observe rather than rush to act again, and even if it hikes again in December, subsequent hikes may not necessarily be consecutive. CME's "FedWatch" data shows the probability of a 25 basis point hike in December is about 80%. The market expects considerable uncertainty over next year's rate path, with possibly one more hike in the first quarter and one to two hikes for the full year. Warsh did not directly address why the Fed did not hike in October, but several supporting factors can be inferred from his remarks: some monetary accommodation was already withdrawn in September and the effects need to be observed; current indicators are decent and market-implied inflation expectations are stable; and more information will be available in the next phase, so it is necessary to gather more information before deciding. In addition, Warsh said the Fed will reduce the frequency of rate votes starting next year. One of next year's eight FOMC meetings and two the year after will not hold rate votes or issue statements, but will instead be dedicated to discussing the long-term framework of monetary policy. This new arrangement is consistent with Warsh's preference for reducing forward guidance and signaling to the market.
Sufficient market pricing, muted reaction, long-end Treasuries may stay rangebound at elevated levels
Because pricing ahead of the meeting was sufficient, the market reaction was limited, reflecting pricing of a temporary pause; the Treasury yield curve steepened slightly, U.S. equities and gold edged higher, and the dollar slipped modestly. At this meeting Warsh's hawkish signal was insufficient, and he did not specifically explain why the Fed paused despite a strong economy, which adds some uncertainty to long-end Treasuries, expected to remain rangebound at elevated levels within the year. The current market focus is mainly on tech giants' earnings, AI capital expenditure guidance, and September core PCE and third-quarter GDP data. According to Warsh's remarks, first-half U.S. GDP growth was revised up from 1.8% to 2.4%, third-quarter growth may exceed 3%, business investment is led by high tech and beginning to spread to other sectors, and job growth is clearly faster than last year. This means that although rate hikes weigh on denominator-side valuations, the core driver for U.S. equities is still numerator-side earnings, reflected in rotation within U.S. equity sectors rather than a sharp index-level decline. With strong fundamentals combined with a gradual pace of hikes, Treasuries and commodities may remain rangebound. The impact on the domestic market is mainly on risk appetite, not a core pricing factor. In fact, in mid-to-late October, previously worrisome peripheral risks such as Treasury yields, rate hikes and oil prices eased marginally, while the domestic equity market traded in a range and the yield curve shifted down overall, mainly driven by the K-shaped divergence in the domestic economy and the behavior of market participants under low expectations and low risk appetite.
Data and information sources: the Fed's monetary policy statement and Warsh's remarks come from public information such as the Fed's official website, and rate hike probability forecasts come from CME's "FedWatch."
Risk warning: The above views are for reference only. The information in this article does not constitute any investment advice to investors, nor does it constitute Manulife Fund's guarantee of future investment; investors should not replace their own independent judgment with such information or make investment decisions based solely on such information. All content in this material is information as of the publication date; if there are changes, please refer to the latest information. Fund investment involves risk. Before investing, please read the fund's legal documents such as the fund contract and prospectus, and make your own investment choice.
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