The Federal Reserve held interest rates at 3.75 percent to 4.00 percent on Wednesday, but the vote was not unanimous, and the market heard the dissent clearly. Two officials, Lisa Cook and Beth Hammack, voted for a quarter point hike, making it a 10-2 decision. The Fed upgraded its assessment of the economy to strong, noted that inflation remains elevated, and left investors pricing roughly an 85 percent chance of a December hike. The benchmark 10 year Treasury yield jumped to 5.050 percent as the yield curve steepened.
Stocks themselves barely moved on the day. The S and P 500 rose 0.28 percent to 7,743.98, the Nasdaq Composite gained 0.27 percent to 26,549.85, and the Dow Jones added 0.19 percent to 52,475.10, all new highs in a session dominated by the Fed and by earnings. Chair Kevin Warsh told his press conference that real growth was tracking toward 3 percent, driven by resilient consumer spending and broad based business and artificial intelligence investment. Markets closed higher on Wednesday as investors reacted to the Fed decision, while analysts noted Warsh offered little clarity on why policymakers would wait until December rather than raise rates immediately.
What the dissent signals
Two dissents for a hike are a message, not a procedural footnote. They tell the market that a meaningful part of the committee already thinks policy is too loose for an economy growing near 3 percent with inflation still elevated. Futures pricing a December hike is the market’s way of agreeing. The risk for the Fed is that waiting makes the eventual move larger, or that a hot data print forces it to act between meetings. The risk of moving now, in the committee’s majority view, is that it tightens into an economy still digesting high rates and heavy corporate borrowing.
Thursday brings the data that will test both views: third quarter GDP, September PCE inflation and jobless claims, all due at 8:30 in the morning Eastern time, followed by a European Central Bank decision. Consensus expectations put GDP growth at 3.0 percent, PCE inflation at 3.6 percent year on year and core PCE at 3.1 percent. A hotter print strengthens the dissenters. A softer one gives the majority room to wait.
The earnings split underneath
Underneath the Fed decision, earnings are splitting the market in a way that matters for rates. About 200 companies in the S and P 500 have reported, with 84 percent beating expectations, and aggregate third quarter earnings are expected to surge 31.8 percent year on year. Strength like that supports the case for holding, or even hiking, because it suggests demand is not collapsing under current rates. It also raises the stakes for Thursday’s data: strong growth plus sticky inflation is exactly the combination that pushes a central bank toward a hike, however much it would prefer to wait.
