To The Moon

According to the latest Reuters survey, market expectations for the Federal Reserve's interest rate path are clearly shifting.

Rate hike expectations for October have cooled somewhat, but another increase in December has become the consensus view among surveyed economists, reflecting how strong economic growth and stubborn inflation pressures are once again shaping monetary policy expectations.

In the survey conducted from October 16 to 20, 94 economists expected the Fed to hold the federal funds rate in the 3.75% to 4.00% range at its October 27-28 meeting.

That view aligns with market pricing, and the meeting falls just days before the U.S. midterm elections in November.

By contrast, rate expectations for December have shifted sharply.

In last month's survey, fewer than half of economists expected a Fed hike in December; in this survey, all 100 respondents expect another increase at that time.

The Federal Open Market Committee (FOMC) had previously agreed unanimously in September to raise rates by 25 basis points.

Recent economic data continue to show strong U.S. growth and inflation running above expectations, but signals from Fed officials indicate that policy adjustments will remain cautious.

Fed Chair Kevin Warsh has consistently made clear he is unwilling to provide guidance on the future policy path and has still not offered a definitive judgment.

Growth and Inflation Pressures Intensify, Rate Hike Expectations Rise

Economists' views on the Fed's terminal rate have also turned more hawkish.

Among respondents, nearly 60% expect the Fed's policy rate to ultimately rise to the 4%-4.25% range.

In addition, among the 92 economists who answered the relevant question, 38 expect the Fed to raise rates at least two more times.

In the September survey, only about one-fifth of respondents held that view.

Alex Pelle, senior U.S. economist at Mizuho Securities, believes the current economic environment already provides ample justification for rate hikes.

Pelle said: "The economy is performing strongly, and there is inflation. From that perspective, the Fed simply does not have much reason to be so worried about raising rates. This is almost the easiest choice to make."

He added: "Unfortunately, the Fed has not responded to this issue more aggressively, but is instead standing still and may even be somewhat behind the curve."

Pelle believes the Fed's decision not to hike in October was a mistake.

He expects the Fed to raise rates by 25 basis points in December, but sees the possibility of a final 50 basis point increase as higher than the possibility of no hike at all.

Michael Gapen, chief U.S. economist at Morgan Stanley, also believes rates face further upside risks.

Gapen said: "The risk is that the Fed may ultimately need to raise rates by more than we expect."

He further noted: "If there are risks to the path of economic growth and inflation, those risks appear to be tilted to the upside."

The U.S. inflation rate has exceeded the Fed's 2% target for nearly six consecutive years.

The median forecast in the Reuters survey shows that the personal consumption expenditures (PCE) price index, the inflation gauge the Fed watches most closely, will remain more than 100 basis points above the 2% target for several more quarters and is unlikely to return to target until at least 2028.

Inflation that remains persistently above target means that even if the Fed pauses rate hikes, it will be difficult to pivot immediately to rate cuts.

If economic growth remains resilient and inflation is slow to decline, the policy rate may need to stay at a higher level for longer.

U.S. Economic Resilience Limits Room for Rate Cuts, AI Investment Becomes Key Support

The U.S. economy performing better than previously expected is an important backdrop to the shift in the rate outlook.

The U.S. economy grew at an annualized rate of 2.2% in the second quarter, with artificial intelligence-related investment among the key drivers.

For the just-completed third quarter, economists expect growth of 3.2%; from October to December, growth is expected to slow to 2.2%.

For the full year, economists expect the U.S. economy to grow 2.3% in 2026 and 2.1% in 2027.

Both growth forecasts are above the 2.0% level the Fed considers non-inflationary.

Abigail Watt, U.S. economist at UBS, said: "A large part of the resilience the U.S. economy has shown comes from artificial intelligence technology infrastructure buildout. We are also seeing consumer spending show greater resilience."

She added: "However, this resilience is likely coming mainly from higher-income groups. They are benefiting through the stock market from the spillover effects of artificial intelligence."

AI infrastructure investment and resilient consumer spending have provided support for economic growth, but economists also point out that these gains may be concentrated among higher-income groups.

For the Fed, the key question is whether overall demand can remain strong in the face of inflation pressures.

If economic growth runs above potential, persistently robust demand could make it harder for inflation to decline.

At the same time, rising energy prices and cost pressures from import tariffs have also made it harder for the Fed to judge the future path of inflation.

After Trump launched a war against Iran, energy costs continued to rise; new tariffs on imported goods also increased cost-of-living pressures.

International oil prices remain above $100 per barrel, further complicating the inflation picture.

With the U.S. midterm elections approaching, rising prices are becoming an important political pressure point for Republicans.

The Fed, meanwhile, must weigh economic growth, inflation risks and interest rate policy.

Bond Yields Swing Sharply as Market Reassesses Fed Policy

Recently, the U.S. Treasury market has repeatedly adjusted, reflecting investors' ongoing revisions to their views on the Fed's next move.

On October 7, as inflation data came in higher and market expectations for a near-term rate hike increased, long-term U.S. Treasury yields climbed to multi-decade highs.

Afterward, as the possibility of an October Fed hike gradually faded, yields fell back by nearly 25 basis points.

The two-year U.S. Treasury yield, which is more sensitive to rate changes, experienced a similar pattern, rising sharply first and then falling back sharply.

This volatility shows that the market is not only focused on published economic data, but also closely watching Fed officials' comments on inflation and the policy rate.

Once policy expectations change, U.S. Treasury yields can adjust rapidly.

This Reuters survey shows that economists' views on near-term policy and their views on the medium-term rate path are diverging: most believe the Fed will hold off in October, but all respondents expect another hike in December.

This shift in expectations means the market's hopes for a Fed pivot toward easing are weakening.

As long as inflation remains significantly above target and economic growth stays resilient, rate cuts will be difficult to establish as a clear near-term option.

Next, whether U.S. economic growth continues to exceed expectations, whether energy prices further push up inflation, and whether the Fed can confirm that price pressures are continuing to ease will become key factors affecting the December rate decision.

For the bond market and other financial assets, changes in rate expectations will also continue to generate volatility.