The slowdown in the labor market and inflation that remains above the Federal Reserve’s target are putting the US central bank in an uncomfortable position. Investors were closely watching the minutes of the latest meeting in an effort to better understand the internal debate at the Fed.
The discussions reveal continued concern about inflation, even as signs of an economic slowdown are gradually emerging.
The question now is whether the Fed can maintain its current stance without increasing tensions in financial markets and the broader economy.
Discussions Focused on a Possible Rate Hike
The minutes of the Federal Reserve’s latest monetary policy meeting were eagerly awaited by investors. Since the arrival of its new chairman, Kevin Warsh, the Fed has been communicating less frequently, making this document even more important for understanding the views of monetary policymakers.
The conclusions did little to reassure the markets. It was already known that three members had voted in favor of a rate hike at the July meeting. The minutes now show that this concern is more widely shared within the institution. Several officials believe that another rate hike could become necessary if inflation remains close to its current levels.
At the same time, the Fed is closely monitoring signs of a slowdown in the labor market. Job creation is losing momentum, which would normally argue in favor of a more accommodative monetary policy. However, the discussions focused primarily on the risk of persistent inflation. A rate cut was not discussed, highlighting the central bank’s current caution.
The Status Quo Remains the Most Likely Option
Despite these debates, the majority of Fed members ultimately chose to keep policy rates unchanged. At this stage, this position also appears to be the most likely outcome at upcoming meetings.
The meeting scheduled for the end of October will take place just a few days before the US midterm elections. In such a sensitive environment, any change in interest rates could be interpreted through a political lens. The Fed is therefore likely to favor neutrality and avoid any decision that could fuel controversy.
That leaves the September 16 meeting. The recent rise in energy prices could reignite discussions about a possible tightening of monetary policy. Even so, keeping rates unchanged appears to be the least risky option. With inflation still too high and the economy showing some signs of slowing, the Fed has few convincing reasons to act quickly in either direction.
Bond Markets Under Pressure
This cautious stance from the Fed comes as the US bond market is going through a turbulent period. Long-term yields have risen sharply in recent weeks, prompting the US Treasury to step in to ease tensions.
Treasury Secretary Scott Bessent announced that the Treasury’s bond buyback program would be doubled to $4 billion. Although this amount remains modest compared with federal debt, which has now surpassed $40 trillion, the announcement had an important psychological impact on the markets. Investors viewed it as a reassuring signal.
It serves as a reminder that US authorities still have several tools at their disposal to stabilize markets in the event of excessive tensions. Many also believe that the Treasury and the Fed could intervene more significantly if the situation were to deteriorate further.
This prospect helped ease the most immediate concerns and slow the rapid rise in yields seen in recent days.
Our View
At this stage, we are maintaining our exposure to US debt. Current yields remain attractive, but we are gradually favoring shorter maturities, which we believe are less exposed to the consequences of deteriorating US public finances.
We are also continuing our bond diversification strategy. In this context, Norwegian government debt remains an important component across our portfolios. Norway’s strong public finances and high-quality credit profile make it, in our view, a particularly attractive complement in the current environment.