The Fed hiked what it pays on reserves into a bond market already heading for 5%

For a lot of depositors, 4% is the line in the sand, according to the Credit One Bank report ^[6]. Set that against a 10-year Treasury above 5% and the gap is more than a percentage point ^[16]. The deposit finding rests on about 500 people who said they had moved money ^[15], so the direction is the information and the level is approximate.

Higher rates arrive at a bank in three directions at once: more revenue on loans, weaker demand for those loans, and harder competition for deposits ^[7]. The lever the Fed pulled is the easy half of its job. Controlling the interest it pays on deposits is much easier than controlling people's perceptions, the column says ^[14].

JPMorgan analyst Bruce Kasman wrote that market expectations about the developed market policy path have shifted sharply since the start of this year ^[3]. The column takes that repricing as evidence that central banks are responding to the market instead of driving it ^[8]. It also says the Fed did not just raise rates, it changed perceptions, and that changes incentives, and that will change behavior ^[18].

Two of the pressures the column names sit outside the reserve rate's reach. Energy prices are rising because of the war with Iran, and they filter through virtually everything people and businesses do ^[11]. Rates are also being pushed up by the debts already carried by the U.S. government and most developed nations ^[12]. The case for hiking is that in normal times higher rates slow activity, which slows inflation ^[13], and the column's objection is that inflation is the result of people's expectations, not, as Milton Friedman argued, a monetary phenomenon ^[10].

I would take the narrower version of that argument. The expectations channel has worked at least once in the visible past: in 2020 the Fed told people it was going to let inflation rise, they believed it, and the column says the Fed has been trying to get that horse back in the barn ever since ^[9]. The counter-reading of the 10-year is equally available from the same print. A yield that walked up toward 5% before the vote is a market that priced the Fed correctly, and with a full percentage point of further hikes already projected through the middle of next year ^[4], any single meeting has little left to tell anyone. Two tests separate the readings. If the 10-year settles back under 5% after the next hike while deposit offers cluster at 4%, the Fed is setting the path. If the curve keeps arriving first and banks have to pay above the policy rate to hold balances, the column has it right.