Fed Holds Rates, But 3 Dissent for a Hike — First Time Since 2016

The Federal Reserve held its benchmark rate steady this week, but the real story was in the vote count. Three FOMC members dissented in favor of a quarter-point hike, the first time since September 2016 that three policymakers broke ranks in the same direction.

The vote

The Fed held its benchmark lending rate unchanged at a range of 3.5%-3.75% for the fifth consecutive meeting, with the persistent conflict in the Middle East clouding the outlook for inflation. The final tally came in at 9-3.

The no votes came from regional presidents Beth Hammack of Cleveland, Neel Kashkari of Minneapolis and Lorie Logan of Dallas. All three wanted a 25 bp hike.

Why it matters

This is the first time since September 2016 that three policymakers dissented with a unified view of which direction rates should head. Translation: the hawkish camp inside the Fed is louder than the statement lets on.

Officials favoring tighter policy argued inflation has been a burden on households and is not showing clear signs of abating. Recent price pressures have reflected both tariffs imposed by President Donald Trump and higher energy costs tied to the Iran conflict.

Market reaction

The Dow sank by 1,153 points and the 30-year Treasury yield hit its highest level since 2007 as investors worried the Fed was not acting quickly enough to bring down stubborn inflation.

Bond desks are now recalibrating. A hawkish hold with three dissents keeps a September hike on the table, and the long end is pricing that in.

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Warsh’s ‘family fight’

“I asked for a good family fight, and I got one,” Chair Kevin Warsh said. He has been in the chair for less than nine weeks and is already presiding over the most divided FOMC in a decade.

Warsh’s refusal to provide clear road signs on where monetary policy is headed led to an unusually high level of uncertainty heading into the meeting. Expect forward guidance to stay minimal.

What’s next

BMO’s Ian Lyngen wrote that the majority is siding with Warsh to keep rates stable until at least September, when policymakers will have the benefit of the July and August CPI reports.

Two more CPI prints before that meeting. If either runs hot, the three dissenters likely pick up allies.

Options market and stocks to watch

Rate-sensitive names and rate proxies are where the action sits after a hawkish surprise like this.

• TLT: watch for continued pressure on long-duration Treasuries as the 30-year yield presses 2007 highs.
• SPY: watch for follow-through selling if yields keep grinding higher into the September meeting.
• XLF: watch bank names for a mixed reaction — higher-for-longer helps NIM but hurts loan demand.
• XLRE: watch REITs for downside pressure as long rates climb.
• GLD: watch gold as a hedge against both stagflation and a policy misstep.

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