The Fed is widely expected to keep interest rates unchanged at this week's meeting despite inflation remaining above target, with some officials signaling a preference to pause and wait for more inflation data before acting.
Markets are pricing in a 25 basis point hike in December. Wall Street broadly expects the Fed to hold rates steady at Wednesday's meeting, though a December increase remains possible. With inflation above the Fed's 2% target and the labor market relatively stable, analysts say policymakers have room to pause while Chair Warsh remains committed to bringing inflation down quickly.
Eric Freedman, chief investment officer at Northern Trust Wealth Management, said: "The available data doesn't support launching an aggressive rate hike cycle." The labor market isn't flashing warning signals, suggesting the Fed doesn't need to tighten for an extended period. The rate-setting committee likely also doesn't want to signal a new hiking cycle to markets.
On the other hand, Chris Hodge, chief U.S. economist at Natixis, explained in a Monday research note that a pause would allow more time to judge whether recent elevated inflation readings form a sustained trend. The current federal funds rate target range is 3.75%–4.00%. The prior action before this October meeting was a September hike, the Fed's first in three years.
Shift in Expectations
CME FedWatch data show market bets on the Fed holding rates steady in October have surged from just 36% a month ago to 90% now. This reflects changing inflation conditions and the market's ongoing interpretation of various signals from Federal Open Market Committee (FOMC) members.
Rebecca Venter, senior fixed income client portfolio manager at Vanguard, said: "We still need a lot of time to understand this Fed's operating style going forward, and the market has a lot of information to digest." Venter believes the shift in market expectations stems largely from Fed officials' public remarks over the past few weeks. Chair Warsh drew attention this summer for his minimalist rate commentary, while other FOMC members have been more direct, recently emphasizing policy flexibility.
Reading Signals From Fed Speak
Warsh has repeatedly stressed the need to abandon so-called forward guidance. But analysts say recent remarks from other members — what Wall Street calls "Fedspeak" — suggest the Fed is likely about to pause. Vanguard's Venter explained: "Multiple members have said inflation remains a key focus, but they've also signaled that policy has room for flexible adjustment. This leads the market to believe the FOMC won't hike in consecutive meetings."
Several Fed officials, including New York Fed President John Williams, Vice Chair Philip Jefferson, and Governors Christopher Waller and Michelle Bowman, have signaled that rate hikes need not be consecutive and that there's no immediate need to raise rates again. Bowman said earlier this month: "At this point, I don't see the urgency for immediate further action." Northern Trust's Freedman concluded: "Simply put, other core officials have lowered the odds of a hike at this meeting."
Why Emphasize Flexibility?
Michael Feroli, chief U.S. economist at JPMorgan, wrote Friday: "Our judgment is that after the September FOMC meeting, the market delivered a very hawkish interpretation that many officials didn't anticipate; they're currently not sure the Fed needs to launch an all-out tightening cycle."
Bank of America analysts still believe October will bring a hike, but acknowledge the Fed is in a complex game. BofA wrote in a research note last week: "Officials' remarks are hard to reconcile with Warsh's public opposition to forward guidance. Warsh can't silence his colleagues; if October brings a hike, it would send a clear signal to markets that the Fed is no longer speaking with one voice on policy. Conversely, not hiking would confirm the market's interpretation of Williams' and Jefferson's remarks. If Warsh stays silent and lets other members guide market expectations on the policy path, he loses his policy voice."
Analysts also noted that the Fed rarely adjusts rates right before an election.
Where Rates Go From Here
After October, market pricing shows a 75% probability of one 25 basis point hike before the December meeting. Vanguard's Venter also predicts a pause in October and a hike in December. She asked: "Could this round of hikes simply be taking back the three preventive cuts from last year?" Another possibility is the start of a longer hiking cycle.
Preston Caldwell, chief U.S. economist at Morningstar, leans toward the first scenario: simply reversing the earlier preventive cuts. He predicts that after 2026, as inflation falls and the economy weakens, the Fed will cut rates twice in the second half of 2027.
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