Fed Poised to Pause in October, But December Could Bring a 50bp Surprise
TREE NEWS reports: Jason Schenker, president of Prestige Economics and the first economist in Bloomberg’s survey to correctly predict the Fed’s September rate hike, now expects the central bank to hold rates steady at its October meeting. However, he warns that if inflation remains stubborn, the Fed could opt for a larger 50 basis point increase in December.
The Fed lacks sufficient data to justify another move this month. “I don’t think they have enough data points to form the kind of conviction they might need,” he said, noting that much of the data released Wednesday was collected before the September hike and therefore does not reflect its effects. The September increase, the first since 2023, was led by Fed Chair Kevin Warsh in response to rising inflation. While October’s CPI came in hotter than expected, driven largely by fuel costs, futures market bets on an October hike briefly exceeded 50% before retreating.
Schenker’s forecast carries weight: he was the earliest among Bloomberg-surveyed economists to call the September move, and his firm, Prestige Economics, consistently ranks among the top forex forecasters. His latest call suggests the Fed will use the October meeting to “buy some breathing room” and gather more data before deciding on a potentially more aggressive step in December.
Market Implications: What a December 50bp Hike Would Mean
Between the October and December meetings, Fed officials will receive two additional employment reports and one CPI reading. “They just have to wait six weeks, but they’ll have more data,” Schenker said. “If they find that a 25bp hike had no effect, I think they could go 50bp.”
Currently, swap markets fully price in a 25bp hike in December. Schenker’s view points to a more aggressive possibility: if inflation does not respond sufficiently to September’s move, the Fed might “choose 50 over 25 to bite off a bigger chunk of this tough problem.”
The implications for financial markets are significant:
- Stocks: A 50bp hike in December would likely trigger a sharp sell-off in equities, particularly in rate-sensitive sectors like technology and real estate. Growth stocks, which have benefited from hopes of a dovish pivot, would face renewed pressure as borrowing costs rise further.
- Bonds: Short-term Treasury yields would spike as markets adjust to a more aggressive Fed. The yield curve could flatten or invert further if long-term inflation expectations remain anchored, but a 50bp move might also steepen the curve if it signals the Fed is serious about fighting inflation.
- Crypto: Risk assets like Bitcoin and Ethereum would likely see increased volatility. A larger hike would strengthen the dollar and reduce liquidity, pressuring crypto prices. However, if the Fed’s aggressive stance ultimately tames inflation, crypto could recover once the tightening cycle peaks.
- Commodities: A stronger dollar and higher rates would weigh on dollar-denominated commodities like oil and gold. However, if inflation remains persistent, gold could find support as a hedge. Energy prices, already elevated, might stay high if supply constraints persist.
- Currencies: The dollar would likely strengthen on a 50bp hike, particularly against currencies of countries with less aggressive central banks. Emerging market currencies could come under pressure as capital flows back to the U.S.
Path Divergence: December’s Move Sets the Tone for 2025
Schenker also outlined two scenarios for next year. If the Fed hikes 50bp in December, he expects the central bank to pause early next year. Conversely, if it only hikes 25bp, the odds of another hike in Q1 2025 rise significantly.
This path matters for asset allocation: the size of December’s hike will largely determine the duration and terminal rate of this tightening cycle. Investors should prepare for volatility around the December meeting and consider positioning for a higher-for-longer rate environment if inflation persists.
Key Takeaways for Investors
- October is likely a hold: Don’t expect a move this month, but use the pause to assess data and adjust portfolios.
- December is the wildcard: A 50bp hike is a real possibility if inflation doesn’t cool. Hedge against rate volatility.
- Dollar strength may continue: A more aggressive Fed supports the dollar, which could pressure commodities and emerging markets.
- Equities face headwinds: Growth stocks are vulnerable to higher rates. Consider defensive sectors and value plays.
- Crypto remains a risk asset: Expect volatility; liquidity conditions will tighten if the Fed goes big in December.
- Watch the data: The next two jobs reports and CPI will be critical in shaping the Fed’s decision. Position accordingly.
As the Fed navigates persistent inflation, the December meeting could be a pivotal moment for markets. Investors should stay nimble and focus on data-dependent strategies.
