On Wednesday we got an October surprise: the Fed day was eerily calm, with Fed Chair Kevin Warsh looking comfortable on stage and offering a slightly dovish take on the future — if a few things improve.
I believe the Fed wants to take back all the interest rate cuts from last year, and then they can assess what is happening in the economy. Of course, the Iran conflict and Trade War 2.0 have complicated their job, but today, given that markets were at one point pricing in five to six rate hikes, was a positive day.
Last I checked, the 10-year was at 5.02%, down after Google reported a bad quarter.
The Fed’s press statement was short and simple, but two things caught my attention.
1. The economy is strong vs. solid
First, the Fed chose to use the word “strong” instead of “solid” on purpose to signal it won’t cut rates and will continue reversing last year’s interest rate cuts while inflation stays above target. “Economic activity is expanding at a strong pace. While uncertainty remains elevated owing, in part, to geopolitical developments, domestic spending has been resilient.”
Warsh said jobless claims data remain low and that the Fed fully intends to bring inflation back to the 2% target, no compromise. He also said the Fed will hold one fewer voting meeting in 2027 and two fewer meetings in 2028; this approach might leave the Fed open to more 50-basis-point cuts or hikes. However, that is another story for another time.
2. Warsh liked the market drama against AI
I got a strong sense that Warsh liked the market getting more restrictive and that we even saw some AI companies shed some blood recently. My theme in the HousingWire Daily podcast lately borrows from The Predator movie: the AI god king can bleed — and that it means you can kill it. I think Warsh was implying no company is invincible, and that if the market gets more restrictive, things can change, as they recently did.
He also talked about how the 10-year yield rolled over even though oil prices have been elevated this month. I believe the 10-year yield rollover is more market-driven, as the 10-year was pricing in more rate hikes than the Fed was targeting at the time. The term premium on the 10-year yield was elevated as it headed to the October high.
If the 10-year had closed over the key level of 5.35%, bond yields had the potential to rise much higher, faster, as the markets would be pricing in a much more aggressive Fed rate hike cycle, but, smartly, they chose not to go that route.
Warsh seems to enjoy that everyone is taking the Fed seriously and that the markets have already done a lot of the work for them. This reaffirms my assumption that all they want to do is take back the rate cuts from last year and then reassess what is going on.
One side note was that Fed Governor Lisa Cook — who is usually a dove — voted to raise rates, which I 100% believe was a trolling tactic on her part since Trump still wants to fire her.
All in all, it wasn’t a bad day; the 10-year yield is above 5% still today, but considering the market was trying to price in five to six rate hikes, and there hasn’t been any end to the conflict or the trade war, I consider this a victory for the month of October.
For housing, the worst-case scenario has been averted and we bought some time, giving space for the conflict to end and the trade war to cool off a bit. What I am hoping for is that we get some more clarity on both of those two items, and then the Fed can make the rate hike cycle just a few rate hikes, and then we’ll take it from there.
