Fed maintains interest rates at 3.75% to 4% with two votes for a hike, and the market is already pricing in tightening in December

The Federal Reserve kept the benchmark interest rate in the range of 3.75% to 4%, but the decision was split: the Federal Open Market Committee (FOMC) voted 10 to 2, with Governor Lisa Cook and Cleveland Fed President Beth Hammack advocating a 0.25 percentage point increase. The information was broadcast by Bloomberg Television, in a special edition of the Bloomberg Surveillance program.

Cook's dissent was the highlight of the afternoon. According to the presenters, it is her first dissent on an interest rate decision as a member of the Fed board. An analyst mentioned on the program noted that she had never dissented in more than four years. Reporter Mike McKee recalled that President Donald Trump is trying to fire the governor and defends lower interest rates. The presenters assessed that the White House must react.

The statement brought a firmer assessment of the economy. According to Bloomberg, the text went on to describe the activity as expanding at a "strong" pace, and no longer "solid". He also said that consumption remains resilient, productivity is strong, capital investment is robust and unemployment has changed little. Inflation, the Fed says, remains high, and the accumulation of more information will help define the appropriate stance to ensure the "timely" return of inflation to the 2% target.

Market was already expecting the break

Maintaining interest rates was the dominant bet on Wall Street. Shortly before the announcement, the probability of a hike was estimated at around 7%, following signals from Fed Vice Chairman Philip Jefferson and New York Fed President John Williams that an October hike was unlikely. After the decision, the market began to price an 88% chance of an increase in December, according to data cited in the program.

The reaction was contained. Two-year Treasury yields rose about 2 basis points, and the 10-year Treasury yield was close to 4.76%. The S&P 500 and Nasdaq gained about 0.2%. The market's attention was focused on the balance sheets of Google and Microsoft, expected for the following hours.

Inflation, growth and the Fed's dilemma

Apollo economist Torsten Slok said inflation of 3.7% at full inflation and the strength of the job market would justify a rise under the Taylor rule. For him, the economy is "bifurcated": interest-sensitive sectors, such as housing and automobiles, are doing poorly, while high-income consumption and fiscal spending remain firm. According to Slok, nominal GDP is rising close to 6%, with inflation around 4% and real GDP close to 2%.

Former Fed Vice Chairman Richard Clarida said the committee appears divided between those who want a recalibration and those who prefer to manage risks and wait for more data. According to him, nominal GDP was close to 7% in the last four quarters, a pace incompatible with the 2% target. Clarida considered that AI should increase productivity and, in the future, help reduce inflation, which complicates the decision.

Diane Swonk, from KPMG, assessed that the Fed is showing caution when it should be showing conviction, after more than five years with inflation above the target. She also cited the pressure of debt: according to the economist, the ratio between debt and GDP rose from 79% to 101% and the deficit reached US$2 trillion in fiscal year 2026, which requires greater compensation from investors.

What to watch out for until December

Fed Chairman Kevin Warsh's press conference was billed as short, with no follow-up questions. The central question, according to the presenters, is why the central bank did not raise interest rates if it considers inflation to be the main problem. Analysts interviewed on the program projected an increase in December, and economist Stephanie Roth, from Wolfe Research, said she believed the Fed waited for the midterm elections to end. For investors, the debate about higher interest rates, public debt and the momentum of investments in AI will remain at the center of the market.

Automatically translated from Portuguese.