For a second consecutive meeting, the US Federal Reserve’s policy committee held its benchmark interest rate at a 22-year high and held out the possibility of further hikes if inflation pressures fail to ease. After 11 increases since March 2022, the target range for the federal funds rate was maintained between 5.25 and 5.5 percent.

In a largely-unchanged statement, officials acknowledged an acceleration in growth, upgrading the economic expansion from “solid” to “strong”. Language which previously noted job creation had “slowed” was revised to say it had “moderated”.

Policymakers retained optionality to deliver another hike, preserving a sentence that referred to “determining the extent of additional policy firming that may be needed”.

The recent ramp in long-term bond yields was highlighted with the insertion of the word “financial” into a sentence which previously warned “Tighter credit conditions for households and businesses are likely to weigh on economic activity, hiring, and inflation”.

This shift in emphasis – toward broader tightening in “financial and credit conditions” – could be seen as a ratification of more cautious comments from a number of Open Market Committee members over the last month, many of whom have suggested that rising long-term yields are doing some of the Fed’s work for it, and lowering the need for further tightening.

Markets are interpreting the statement as modestly dovish, on balance, and are lowering odds on additional hikes across the front end of the curve, while raising the likelihood of rate cuts by mid- to late-2024.

This comes after this morning’s two-step drop in yields. The first was triggered when the US Treasury said it would sell $112 billion in long-term bonds at its quarterly refunding auctions next week, with issuance slightly more front-loaded than in August – a smaller sum than expected, and a maturity allocation that should reduce strain on buyers. The second came when the Institute for Supply Management said its key manufacturing index had fallen to 46.7 in October from 49.0 in September, suggesting that a sector which drives roughly 20 percent of overall economic activity is caught in a deepening downturn.

Ten-year yields are holding around 4.8 percent as we go to pixels, down sharply from levels reached a few days ago, but the dollar is holding its gains as traders bet the burden of slowing activity will land harder on other economies.