Federal Reserve officials appear inclined to keep interest rates unchanged at their Oct. 27-28 policy meeting. But don't be fooled by a pause: More rate increases are likely coming, possibly as soon as December, to tame escalating inflation.
The Fed raised its benchmark interest rate by a quarter of a percentage point in September, to a target range of 3.75%-4.00%, its first increase since 2023. Officials have since indicated that they want more time to assess the economy before making another move.
There is plenty to assess, and some of it isn't encouraging.
The consumer price index rose 3.7% in September from a year earlier. That was a stronger-than-expected increase and a sizable jump up from August's 3.4% annual growth rate. Prices climbed o.6% month to month in September, with a 9.1% jump in gasoline accounting for more than half the increase. Core inflation, which excludes volatile food and energy prices, accelerated to 2.6% annually from 2.4% in August.
There were signs of broader price pressures, too. Airfares, education, recreation, and used vehicles all became more expensive.
Producer prices surged 1.3% in September, their largest monthly gain in four years. Wholesale prices were up 6.3% from a year earlier, raising concerns that businesses could pass additional costs on to consumers in the coming months.
The numbers strengthened the case for higher interest rates, but markets don't think the latest data changed the Fed's apparent preference for waiting until later this year to raise rates. The latest reports make a December increase more likely, said James McCann at Edward Jones. He expects one increase in 2027, as well.
"The Fed won't panic in the face of these numbers, but the data will add to the conviction on the FOMC [Federal Open Market Committee] that policy needs to be tighter to help drag inflation back to target," he wrote in a note Friday.
Inflation has run above the Fed's 2% annual target for more than five years. Central bank officials spent the week explaining why they are concerned about inflation without committing to an immediate rise in rates.
Chicago Fed President Austan Goolsbee called Wednesday's CPI report discouraging. But in an interview with Yahoo Finance, he cautioned against placing too much weight on a single report.
"I don't think we yet know the answer to that," he said when asked if more rate hikes are needed. But "if we get more months like this...that's totally unacceptable," he said of the inflation report.
Speaking in Bangkok on Wednesday, Fed governor Michelle Bowman said she saw no urgency to adjust rates again. "We have some time to wait and see how financial conditions evolve before we take more action," she said.
San Francisco Fed President Mary Daly suggested that further tightening would probably be needed but not at the next meeting. "Why force urgency when you don't need to have urgency?" Daly said Wednesday in an interview with Reuters. "We have more meetings ahead of us."
Cleveland Fed President Beth Hammack offered an argument for acting sooner, however. In remarks Monday, she warned that inflation is becoming increasingly broad-based and that businesses are beginning to incorporate higher costs into their pricing plans. "When feasible, I generally think it's preferable to make smaller adjustments, and to do so relatively quickly, rather than to wait and risk needing a larger course correction," Hammack said at the meeting of the National Association for Business Economics (NABE) in Cleveland, Ohio.
On Thursday, speaking at an event held by Goldman Sachs, she warned that deteriorating inflation expectations could require more aggressive rate increases. The warning caused some to speculate that a half-percentage-point increase is on the table later this year.
The Fed's Beige Book, released Wednesday, showed economic growth slowing in parts of the country, with hiring subdued and lower-income consumers pulling back on spending. Businesses reported rising costs from energy and tariffs, and noted that customers were becoming less able to absorb higher prices.
Fed Chair Kevin Warsh offered little indication Thursday evening that the latest data had changed his thinking. Speaking in Bangkok, he said economic developments since the September meeting had matched the Fed's expectations.
"I don't prejudge meetings," Warsh said.
Investors took his comments as another reason to expect a pause. They are now pricing in an 83% chance that rates remain unchanged at the October meeting, according to the CME FedWatch tool. Expectations for an increase had briefly surged following Wednesday's inflation report.
The Fed's October meeting will take place less than a week before the midterm elections.
Research by CME Group's Mark Shore found that the Fed left interest rates unchanged between Oct. 1 and Election Day in about two-thirds of election years from 1972 through 2024.
This past week's data and Fed speakers suggest more monetary tightening might be merited later in the year, but the September increase may have bought the Fed some time.
For now, investors and economists are looking past October to a possible December increase.
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