Markets and economists are united in expecting the Federal Reserve to leave interest rates unchanged at the 28 October FOMC meeting despite hot inflation prints in September. According to reports from Investing.com India, ING Economic and Financial Analysis, and AFP, the immediate reaction to the surprise 0.3% month-on-month core CPI print sent chances of an October rate hike above 50%, but this didn't last long. Earlier comments from Federal Reserve Vice Chairs Philip Jefferson and Michelle Bowman, along with Governor Chris Waller, signalling no rush to decide on the next policy move quickly calmed markets. The Atlanta Fed's market-probability tracker currently assigns roughly a 94 percent chance of at least one additional hike by the end of the year, while CME FedWatch data indicate an 80 percent probability of a quarter-point rate increase at the December meeting. TD Securities strategists expect the Fed to keep the Fed Funds rate at 4.00% at the October meeting, with the pause increasing likelihood of rate hikes in December and March.
Fed Chair Kevin Warsh subsequently chose not to talk up the chances of action when he spoke at the IMF meetings in Bangkok, unlike at the Jackson Hole Conference before the September hike. As reported by Investing.com India, ING Economic and Financial Analysis, and AFP, while recent jobs numbers have been disappointing and interest rate-sensitive sectors are experiencing increasing pain, the economy is growing robustly and inflation remains above target. New York Fed President John Williams has said that the Fed has time to gather more information, while San Francisco Fed President Mary Daly has similarly argued that additional tightening will likely be needed but not necessarily right away. The leading monetary rules leave room for that approach, as they prescribe a policy rate ranging from about 3.8 percent to 5.7 percent. TD Securities notes that under a context of a labor market that remains in good shape, such an inflation backdrop would advocate for a continuation of the tightening cycle at the October meeting. Former Fed official Loretta Mester told AFP that economic conditions supported further monetary tightening, pointing to a stable labour market and inflation remaining above the central bank's target, though she expects most policymakers appear reluctant to move too quickly.
The Fed faces significant inflation challenges as the PCE price index reached a three-year high of 3.9% in May, up from around 2.2% by late 2024 when the Fed's rate increases brought inflation down from its pandemic-era peak of 7.2% in 2022. According to AFP, since the US and Israel attacked Iran in late February, global energy prices have surged with retaliatory actions by Tehran sharply restricting oil and gas supplies through the Gulf. Higher energy costs have also begun feeding into the prices of other goods and services, putting affordability at the forefront of concerns ahead of the November 3 US midterm elections. The Fed's preferred inflation gauge, the Personal Consumption Expenditures (PCE) price index, has struggled to meet the central bank's long-term target of 2%, which it has missed for more than five years. The US economy has also been dealing with weakening consumer confidence and signs of stress in an otherwise resilient jobs market, with the latest consumer confidence survey from the Conference Board expected to show a further decline in October after confidence fell in September to its lowest level in more than a decade. Consumer prices rose 3.7% in the year to September, up from 3.4% in August, according to the Bureau of Labor Statistics, with energy prices up 20.4%.
Looking towards the December meeting, analysts are forecasting a 25bp rate hike (leaving the Fed funds target rate range at 4-4.25%) followed by a prolonged pause through to December 2027. According to Investing.com India, ING Economic and Financial Analysis, and AFP, ongoing concerns about elevated price pressures mean we do expect a December interest rate rise. The Fed's own projections show the median FOMC participant projected that the unemployment rate will remain near 4.1 percent through the end of 2026 and that PCE inflation will end the year at 3.7 percent. Interestingly, core PCE inflation is projected to reach 3.4 percent, indicating officials anticipate year-over-year inflation to continue rising through the end of 2026, even after excluding food and energy categories. The analysis suggests that with US wage growth at just 3% and housing costs at 35% of the inflation basket, overall US inflation can fall back to 2% in the second half of 2027. TD Securities warns that barring an unexpected shock, the December rate hike is all but locked in, with pausing next week setting the bar high for avoiding an additional rate increase this year. Former Fed official Loretta Mester told AFP that she expected the Fed could hold rates steady in October and consider another increase at its next meeting in early December.
The Fed's rate decision comes just days before the November 3 US midterm elections, where Democrats are seeking to wrest control of both chambers of Congress from President Donald Trump's Republican Party. According to AFP, Wendy Edelberg from the Brookings Institution said central bankers would prefer to avoid becoming part of the political debate ahead of the elections, noting it's unhelpful for everyone if the Fed gets wrapped up in political discourse right before an election. She added that raising rates in December rather than October would have limited economic implications, viewing a possible delay less as a concession to Trump, who has repeatedly called for lower interest rates, and more as a way for the Fed to avoid becoming a target of political criticism. Trump has repeatedly criticised the Federal Reserve over interest rates, which he considers too high, though he has so far refrained from directing similar criticism at Kevin Warsh, whom he appointed to succeed Jerome Powell as Fed chair. Since returning to power last year, Trump has mounted an unprecedented challenge to the central bank's independence, launching a criminal investigation into Powell and attempting to remove Fed Governor Lisa Cook, though the investigation into Powell was dropped to smooth Warsh's confirmation by the Senate.
