The Federal Reserve held interest rates steady at 3.75%–4% on October 28 in a split 10-2 vote, with Governors Lisa Cook and Beth Hammack dissenting in favor of an immediate quarter-point hike. Now MarketWatch is asking the uncomfortable question: did the Fed just make a mistake — and can the Treasury bail it out?
Federal Reserve building (Credits: MarketWatch)
Fed Chair Kevin Warsh insisted anyone second-guessing the central bank’s determination to get inflation back to 2% would be making a mistake. Yet the Fed paused anyway, with Warsh pointing to an “information-rich” backdrop ahead. As Jim Baird, chief investment officer at Plante Moran Financial Advisors, put it after Thursday’s data: “But if that’s the case, what are you waiting for? It is tough to square right now.”
The Economy Is Not Cooperating With the Pause
Thursday’s data made the decision look harder to defend. Third-quarter GDP expanded at a 3.4% annualized pace — above the 3.1% expected — while nominal GDP surged 5.6%, powered in no small part by the artificial-intelligence spending boom. With the economy running this hot and inflation still elevated, Gennadiy Goldberg, head of U.S. rates strategy at TD Securities, called October “a bit of a write-off,” arguing it was nearly impossible for Warsh to project an aggressive inflation-fighting stance without a good explanation for the hold.
Not everyone agrees it was wrong. Tom Graff of Facet called the pause a mistake, saying Warsh should have hiked to prove his inflation-fighting credibility. But Ronald Gestiehr of Luttner Financial countered that the Fed is “walking a fine line” — hiking too fast risks tipping the economy into recession.
How the Treasury Could Help Save the Day
With a December hike now ~85% priced in on CME FedWatch, expectations are shifting to the Treasury Department. Treasury Secretary Scott Bessent told CNBC that another Fed hike wouldn’t “necessarily” be a mistake — a notable tolerance from the administration’s top economic spokesman.
More concretely, MarketWatch reports expectations are high that the Treasury’s upcoming funding plans will reduce longer-term bond supply in an attempt to boost demand and lower yields — effectively doing some of the Fed’s heavy lifting by capping long-term rates even while the policy rate sits still.
The September PCE inflation index lands today, with estimates near 3.60% year-over-year — nearly six years above the Fed’s 2% target. Whether the October pause ages well depends on what that number says, and what Bessent’s Treasury does next.
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Source: MarketWatch — read the full story there.
