Fed minutes point to another hike this year; 10-year at 5.35%

Good morning. The minutes from the Fed's September meeting, released last night, had a hawkish tilt. Every voting member backed the September hike, and most thought one more increase this year would be appropriate. There's no urgency for October, though, so it reads more like insurance with December in mind.

What keeps the Fed on edge is inflation expectations. In a New York Fed survey, consumers' one-year inflation outlook rose to 3.9%, the highest since May 2023. The San Francisco Fed listed AI chips alongside tariffs and oil as a lasting inflation shock. The 10-year Treasury yield climbed to 5.35%, its highest since 2002.

Stocks wobbled early, with the Dow down more than 400 points at one stage. The mood improved after a Treasury auction was absorbed smoothly and yields settled. Beneath the surface it's uncomfortable, though: since September, only tech has risen among the S&P 500's 11 sectors, and rising yields are quietly dragging down this year's earlier winners.

The AI-bubble debate also heated up. Ray Dalio warned that rising rates and debt are bringing the AI boom to the edge of a classic bubble, and optimism at forums in Singapore visibly cooled. Meanwhile the 30-year fixed mortgage rate rose to 7.49%, the highest since November 2023.