Special Topic: Ahead of the Federal Reserve's interest rate decision, the probability of a rate hike before the midterm elections is extremely low. MUFG has provided a four-scenario analysis for this week's Fed rate decision, with the base case being a hawkish pause (55%), followed by a neutral pause (35%), a dovish pause (5%), and a hawkish hike with a 5% probability. The detailed analysis is as follows:
Dovish pause at 5%: A dovish signal would only emerge if there is a unanimous vote to keep the federal funds target range unchanged while also updating language related to the inflation framework task force. Apart from that, it would be difficult for Fed Chair Warsh to convey a dovish tone during the press conference, as he would be pressed on the stronger-than-expected September CPI and PPI data.
Neutral pause at 35%: There is a possibility of a unanimous decision to keep rates unchanged, but the accompanying press conference tone would lean balanced. How Chair Warsh responds to questions about recent inflation data will largely determine the overall tone. He is unlikely to downplay inflation warning signals, but he may hint that the Fed can comfortably assess the appropriate path for the overnight rate, or emphasize that policy has no preset rate hike path (thereby explaining this pause). He could also stress that the root of inflation pressure comes from geopolitical events, which are external factors beyond the Fed's control. MUFG believes such remarks would be interpreted by the market as neutral.
Hawkish pause (base case) at 55%: The policy statement's description of the economy will likely follow the same language as the previous FOMC statement: household consumption and capital investment are "strong"; the labor market is in "equilibrium," with employment growth matching the size of the labor force (i.e., the breakeven employment growth rate); and inflation remains elevated. However, the voting composition will send a hawkish signal, with as many as three dissents in favor of a rate hike possible at the October meeting. Press conference: Chair Warsh's past speeches and the overall style of previous FOMC press conferences have leaned hawkish. He is not expected to provide any forward guidance, but he will certainly be asked about the recent much stronger-than-expected inflation data. If he fully acknowledges the latest inflation signals while reiterating that "inflation problems require proactive choices," this would further reinforce the hawkish policy bias.
Hawkish hike at 5%: This scenario has a low probability. Rate futures are already pricing in very little chance of a hike at this meeting, and a direct increase in the policy rate, regardless of the press conference remarks and tone, would itself be a very strong hawkish shock.
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