Key Highlights

● The Fed changed its growth description from 'solid' to 'strong'.

● The statement also said inflation remains elevated.

● Several wording changes pointed to a hawkish tilt.

● Odds of a December hike rose after the statement.

Fed watchers live for small wording changes, and one word did a lot of work this time. In September, the Federal Reserve described economic growth as solid. This time, it chose strong, with the new statement reading that economic activity is expanding at a strong pace, alongside a rate hold with two hawkish dissents.

When a central bank is fighting inflation, a stronger economy is a double-edged sword: it reduces the risk that higher rates tip the country into recession, giving policymakers more room to tighten, but it also suggests demand could keep prices elevated.

The Tension Made Explicit

Right after the growth upgrade, the statement said inflation remains elevated. The Fed noted that domestic spending has held up despite elevated uncertainty, and that productivity growth and capital investment are strong, with Fed Chair Kevin Warsh describing capital spending as not just strong, but it is broadening.

The growth upgrade was not the only edit: language saying policy supports a return to the inflation goal was dropped, and the Fed left its benchmark rate range unchanged in a 10-2 vote, with two officials dissenting in favor of a hike.

How Markets Responded

Odds of a December hike rose after the statement, and long-dated Treasury yields climbed, posting their largest daily gain in a month. Stocks held up anyway, with the S&P 500 rising for a third straight session as investors appeared to focus on earnings.

Some economists think the hawkish tone may not translate into much more action, while others see a clear path to tightening given the majority's apparent support for further policy firming by year end.