Fed expected to hold rates as officials show 'a distinct lack of urgency'

For a moment, the October meeting looked to be a live one, after the September CPI data showed a jump in headline inflation and a surprise nudge higher in core price pressures. Since then, however, FOMC officials have voiced a distinct lack of urgency to tighten just yet, pouring cold water on the notion of another hike this month.

Futures markets now see less than a one-in-ten chance of an increase this week, a correction that we partly attribute to AI-driven wobbles in equity markets.

Macroeconomic news since the September meeting has been mixed, but not enough to bring forward our expected hike from December.

Core PCE inflation came in softer than expected, and even the upside surprise in CPI offers inconclusive evidence that higher energy costs are feeding into broader prices. September payrolls rose by just 29k, unemployment edged up to 4.2% and wage growth slowed to 3%, all of which limit the risk of second-round effects taking hold.

Bond markets also continue to do some of the Fed’s work for it. The 10-year yield touched a 24-year high of 5.35% on 8th October before retreating, but borrowing costs remain elevated and continue to tighten financial conditions.

The French bond rout and the wobbles in AI-related stocks have added to the sense of fragility in markets worldwide. This is not an obvious moment for the Fed to risk compounding a sell-off, and with the midterms a week away, we think most of the committee will be happy to wait.

There will be no new dot plot or economic projections this month, so the focus will fall on the tone of the Fed’s communications. The message will probably be that the economy is in decent shape, inflation is too high and more work needs to be done to return it to target in a timely manner.

As we know, however, Chair Warsh has a clear aversion to forward guidance, so any hint of a December hike is likely to be veiled in data dependence rather than spelled out. We expect a short statement and a matter-of-fact press conference, leaving markets to draw their own conclusions about what comes next.