Fed Set to Hold Rates Despite Stubborn Inflation
TREE NEWS reports: The Federal Reserve is widely expected to keep its benchmark interest rate unchanged at 3.75%-4.00% at tonight’s policy meeting, even as inflation data continues to run hotter than anticipated. 94 of 100 economists expect no change, and CME fed funds futures imply only about a 10% chance of a hike. Yet the case for tightening is hardly settled: September core CPI rose 0.3% month-over-month, above the 0.2% consensus, pushing the annual rate to 2.6%, while the three-month annualized pace jumped from 2.0% to 3.4%. The contradiction sets the stage for a high-stakes press conference where Fed Chair Kevin Warsh must explain why the central bank is standing pat while inflation drifts further from its 2% target—without damaging the Fed’s hard-won credibility.
Behind the Pause: A Tacit Every-Other-Meeting Pact
The pause is not a sign of complacency but part of a carefully choreographed cadence. Fed officials have signaled in recent weeks that they prefer to hike at every other meeting: after a September increase, October is skipped, and December is the likely venue for the next move. New York Fed President John Williams said there is “no urgent need to act” in October, while Vice Chair Philip Jefferson noted policymakers may need more time to assess data. Governor Christopher Waller framed it succinctly: hikes “need not occur at consecutive meetings but should arrive in reasonable time.” The FOMC minutes back this up—all 19 officials supported September’s hike, and a “majority” see one more increase this year as appropriate. December, not October, has always been the compromise.
Hawkish Dissent: Three Votes Against?
A hold does not mean unanimity. Several institutions expect multiple hawkish dissents, with Cleveland Fed President Beth Hammack, Dallas Fed President Lorie Logan, and Minneapolis Fed President Neel Kashkari—who voted against a pause in July—likely to push for a 25-basis-point hike. Logan has argued rates need to rise “50 basis points or more,” while Hammack stresses the need to reach restrictive territory “sooner rather than later, in smaller but faster steps.” JPMorgan’s Michael Feroli anticipates at least two dissents (Hammack and Logan), with Kashkari a possible third. ANZ’s Brian Martin is the most vocal hawk on the Street, arguing that September CPI did not meet the bar Warsh set at Jackson Hole: that the FOMC must be confident underlying inflation is moving toward target at a “clear and sufficient pace.”
Market Implications: All Eyes on Warsh’s Words
With the decision itself nearly a foregone conclusion, the real market risk lies in the press conference. Bank of America is the most prominent dissenter on the outcome, maintaining a call for a 10-basis-point hike. Strategist Mark Cabana warns that if Warsh pauses without a clear explanation, the market could reprise the “dovish misstep” of the July press conference, when Warsh dismissed data’s influence on policy as “not much”—triggering a sharp selloff in long-dated Treasuries. BofA sees a surprise hike as the biggest hawkish shock since 2009, with only 3 basis points priced in, potentially sending 2-year yields up 15-20 basis points and flattening the curve. Goldman Sachs expects the hiking cycle to end after one more move in December, arguing that tariffs, energy shocks, and AI-related measurement issues explain the entire 1.1-percentage-point overshoot in core PCE. However, San Francisco Fed data cited by Apollo’s Torsten Slok shows that half of current 3% core PCE is demand-driven—a portion that rate policy can address, but supply-side pressures may not fade on their own.
Key Takeaways for Investors
- Position for volatility around the press conference: The decision is priced; the rhetoric is not. Expect swings in front-end rates, the dollar, and curve shape depending on whether Warsh emphasizes inflation (bear flattening) or financial conditions (bear steepening).
- Watch the dissents: Three hawkish dissents would signal a more aggressive tightening path ahead and could lift short-term yields.
- Curve trades in focus: BofA’s 2s30s flattening trade remains a key barometer; a poorly explained pause could steepen the curve by 5-7 basis points.
- Inflation is not dead: With core CPI re-accelerating, the risk of a December hike—and even a March follow-up—remains live, keeping pressure on duration and rate-sensitive equities.
- Crypto and commodities: A hawkish surprise would likely strengthen the dollar and weigh on gold and bitcoin, while a dovish misstep could revive risk appetite temporarily but undermine confidence in the Fed’s inflation-fighting resolve.
