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Certainly, it wasn’t any surprise that at today’s meeting the Federal Reserve decided to keep its policy rate steady at 5.25% to 5.50%. Going into the meeting the CME FedWatch tool put the odds of the Fed standing pat on rates at close to 100%.

So why then the huge rally in the 10-year Treasury that pushed yields down 18 basis points on the day to 4.76%?

Because, I believe, the market heard confirmation for its theory that a big increase in bond yields–before today’s move the yield on the 10-year Treasury was up 37 basis points in the last month and 90 basis points (almost a full percentage point) in the last year–made any further increases in interest rates by the Fed unnecessary. The bond market had done the Fed’s job for it.

Comments by Fed chair Jerome Powell seemed to confirm that the Fed agreed with Wall Street. In its post-meeting statement the Fed’s Open Market Committee said that “tighter financial and credit conditions for households and businesses are likely to weigh on economic activity, hiring, and inflation.” The statement added the word “financial” to language that previously referred only to credit conditions. Powell echoed that emphasis on higher yields in his comments: He said financial conditions have “tightened significantly in recent months driven by higher, longer—term bond yields, among other factors.” The Fed chief said previous rate hikes were putting downward pressure on economic activity and inflation, and the full effects of tightening had yet to be felt.

All that convinced the financial markets that another interest rate increase–one last hike–was unlikely at either the December 13 or January 31 Fed meetings.

My thoughts?

First, the Fed did leave the possibility of one more interest rate increase on the table. It now seems very unlikely for December. January? We’ll see.

Second, the Fed’s emphasis on tighter financial conditions as a result of higher yields on bonds buttresses my argument that the Fed has indeed lost control of interest rates with the bond market now calling the tune. Higher interest rates in the remainder of 2023 and in early 2024 will be a result of a further drop in bond prices and a further increase in bond yields.

Whatever the Fed decides to do with its own short-term benchmark.