The Fed Held. The Stance Did Not.
The Federal Reserve held its target range at 3.75 to 4 percent on Wednesday. The vote was 10 to 2.
Governor Lisa Cook and Cleveland Fed President Beth Hammack both wanted a quarter-point increase. The statement described the economy as expanding at a strong pace, an upgrade from solid in September.
That combination was read as a hawkish hold. Two members voted to raise, and Chairman Kevin Warsh declined to say what comes next.
The key observation is that the Committee left the rate alone at a level barely above the inflation it says it is fighting.
A rate is a number. A stance is that number measured against something else.
The Committee's objective is 2 percent inflation on the price index for personal consumption expenditures. That index rose 3.4 percent in the year to August, according to the Bureau of Economic Analysis.
The midpoint of the target range is 3.875 percent. Subtract one from the other and the real policy rate is under half a percent.
Core prices on the same index rose 3.0 percent, which lifts the real rate to about nine tenths of a percent. The consumer price index rose 3.7 percent in the year to September, which pushes it close to zero.
Gasoline drove most of that September increase, according to the Bureau of Labor Statistics. Warsh told the press conference that energy prices have risen again in recent weeks.
He also said inflation has run above the Committee's objective for close to six years. The Committee raised rates in September, its first increase since 2023.
The Committee met on October 28. The September reading of the index in its objective was published the following morning.
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This is a rate-inflation erosion.
The Committee votes on the nominal rate. The stance is that rate minus the rate of inflation, and inflation does not come up for a vote.
When inflation runs faster and the rate holds, the stance loosens between meetings. No one has to decide anything for that to happen.
The two dissents are consistent with reading the real rate as already too low. Neither the vote record nor the statement says that, so the reading is an inference rather than a finding.
Which price measure belongs in that subtraction is a live question among economists. Headline, core and the consumer price index give three different real rates, and all three are under one percent.
The S&P 500 rose about 0.15 percent between the statement and the end of the press conference. The hold matched what futures had priced going in.
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What moves the gap
The personal consumption expenditures price index. The Committee's 2 percent objective is written on this index, which makes it the subtraction that sets the stance. A slowdown there would widen the real rate without any vote. A pickup would narrow it the same way. (Source: Bureau of Economic Analysis)
One-year inflation expectations in the Survey of Consumer Expectations. Households report each month what they expect prices to do, and Warsh named anchored expectations as the task in front of the Committee. An increase would show the energy move spreading past the pump. A flat reading would show it staying where it started. (Source: Federal Reserve Bank of New York)
The producer price index for final demand. This measures the prices producers receive, one step before anything reaches a household. An acceleration would show cost still moving down the chain. A flat reading would show it stopping with the producer. (Source: Bureau of Labor Statistics)
The Committee can hold a rate. It cannot hold a stance, because the other half of a stance is set outside the room.
Talk soon,
The Playbook Daily
