An October rate hike is on the table after latest inflation print
Federal Reserve Chair Kevin Warsh arrives for a press conference after the central bank raised rates in September.
Market participants and economists are split on the question of whether or not the Federal Reserve will raise interest rates by another quarter-point in two weeks.
Fed Chairman Kevin Warsh won't mind. He has stressed that he wants officials to hold off from telegraphing their plans ahead of Fed meetings, allowing a open debate among officials at their two-day meetings. Their next is set for Oct. 27-28.
"There is definitely a two-sided risk, which is exactly what Kevin Warsh wants. He wants more live meetings where the market doesn't exactly know what the Fed is going to do," said Chris Hodge, head economist for the U.S. at Natixis CIB Americas.
Prior to Wednesday's release of the September consumer-price inflation report, traders in derivative markets were thinking that the Fed would keep rates unchanged at their October meeting following a quarter-point hike last month, the first since 2023.
Those expectations were guided by speeches from many Fed officials who said the central bank doesn't need to rush to raise interest rates.
But the strength and breadth of the surge in inflation in September has changed the equation and raised market expectations for an October rate hike to nearly 40%, up from 22% one day ago.
"Understanding that the Fed is not responding directly to individual data releases, it is still hard to see how they could justify holding rates steady again in October based on the details of this report," wrote Thomas Simons, chief U.S. economist at Jefferies.
The price of core goods, or all items excluding food and energy, rose by 0.25% in September, the biggest monthly increase since January 2025, Simons said in a note to clients.
There's other data making a salient argument for hikes in October and December, said Kathy Bostjancic, chief economist for Nationwide.
"Inflation is running too hot compared to the Fed's 2% target, economic activity is buoyant, and the renewed rise in energy prices risks spilling over to other goods and services beyond just the direct impact we have seen in airline fares that are up a sharp 22% from a year ago," Bostjancic wrote in an email.
The rationale for pausing in October
Other economists acknowledge that the CPI data opens the door for another hike this month, but think the Fed will ultimately decide to pause until the following meeting in mid-December.
September's inflation report "probably isn't quite strong enough to push the Federal Reserve to hike again in October given the recent run of comments from officials, who suggest they are in no hurry to hike after September's 25-basis-point move," wrote James Knightley, chief international economist at ING.
Hodge of Natixis CIB thinks there are several reasons for the Fed to skip hiking rates in October.
For one, the midterm elections will be held just six days after the Fed's decision.
"I don't think the Fed wants to get caught in any political crossfire, and hiking less than a week before the midterm elections could potentially do that," Hodge said.
White House officials have suggested a rate hike in October might not be wise. Kevin Hassett, a top White House economic adviser, said he hoped the Fed would wait to see the October CPI report before hiking because the September uptick in inflation may be fleeting.
Another reason to hold off on hiking rates is that Warsh has argued inflation is coming down - just too slowly.
If inflation is gradually heading down, then a cautious approach of acting at every other meeting makes sense, Hodge said.
A third argument is that the AI buildout and stock-market gains might be masking an economy that isn't as robust as it looks, he added. In that scenario, a rate hike runs the risk of slowing the economy too much.
"The potential fragility of the economy is an argument," Hodge said.
Fed will go dark on Saturday
Economists will be listening closely to Fed officials over the next few days to see if there is any change in guidance. Warsh will be speaking late Thursday evening, East Coast time, from the International Monetary Fund/World Bank annual meeting in Bangkok.
On Saturday, Fed officials will stop speaking publicly until after their policy meeting.
"Whether he likes it or not, Warsh has the final word going into the blackout period," said Tim Duy, chief U.S. economist at SGH Macro Advisors.
-Greg Robb
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