Rate Hold Bets Lead Ahead of Fed Meeting as Inflation Stands at 3.7%
Key Facts
The Federal Reserve is expected to conclude its meeting on Wednesday without changing interest rates, after futures showed a near-zero probability of a hike in October, according to The Associated Press. The meeting takes place on October 27 and 28, with Chair Kevin Warsh scheduled to hold a news conference on the second day. The expectations follow a revival in rate-hike bets after the latest inflation data, before they receded. According to Axios, the probability of a hike jumped to 50% from 22% after a higher-than-expected reading, then fell to 28% on Thursday afternoon. “I don’t get ahead of meetings,” Warsh said in Bangkok. Attention is focused on the committee’s statement and the chair’s tone, as the rate path remains under debate.
October’s volatile rate bets followed an acceleration in consumer prices in September: the price index rose 0.6% for the month, compared with a 0.4% increase in August, while annual inflation reached 3.7%, after 3.4% in the previous 12-month reading. The Bureau of Labor Statistics said the gasoline index rose 9.1%, accounting for more than half of the monthly increase in the overall index, while the energy index rose 5.2%. In Federal Reserve staff estimates, personal consumption expenditures inflation was 3.8% in August, while core inflation was 3.4%. The September minutes attributed the rise in inflation to the effects of earlier tariffs, higher energy and input costs linked to geopolitical developments, and prices of goods associated with building AI infrastructure. The minutes said inflation remained elevated while gross domestic product was expanding at a strong pace.
The Fed raised its target range for interest rates by a quarter percentage point in September to 3.75%-4%, and the committee voted unanimously, 12 to zero, in favor of the decision. EL7’s calendar recorded the effective interest rate at 4% on September 16, compared with 3.75% at the previous decision on July 29, matching the September forecast of 4%. The decision statement said inflation remained elevated relative to the committee’s 2% target. In the meeting minutes, most participants said another increase could be appropriate by the end of the year, while stressing that upcoming decisions would depend on incoming data. The minutes also showed that market pricing for the policy path rose markedly between meetings, and that investors had assigned high odds to a quarter-point increase in September. This background explains why the retreat in October hike bets does not mean the possibility of tightening at later meetings has disappeared.
In a sign of possible divisions within the committee, The Associated Press quoted observers who expected two or three dissents among the twelve voting officials at the October meeting. The agency said Cleveland Fed President Beth Hammack and Dallas Fed President Lorie Logan were likely to support a rate hike. These are estimates ahead of the decision, not an announced voting outcome. For household borrowing costs, the average 30-year fixed mortgage rate reached a three-year high of 7.4% earlier in October, before easing to 7.32% in the week before the meeting. Mortgage costs show how interest-rate levels continue to pass through to housing finance, even after retreating from their recent peak. In the Treasury market, the 10-year yield fell to 4.98% from 5.00% late Friday, while the two-year yield rose to 4.71% from 4.69%.
The monetary policy meeting came as Asian stocks posted mixed performance, following gains led by AI shares on Wall Street, according to The Associated Press. South Korea’s Kospi closed up 3.1% at 5,638.34 points on Tuesday, after rising more than 4% during the session. Tokyo’s Nikkei rose 1.7% to 63,268.37 points, while the Hang Seng fell 0.6% to 23,077.56 points and the Shanghai Composite declined 0.3% to 3,648.30 points. In Monday’s session, the S&P 500 rose 0.7%, the Dow Jones gained 0.3% and the Nasdaq Composite advanced 0.8%, bringing the first index to within 1.8% of its record high set earlier in the month. The agency noted that U.S. futures retreated after early gains. In digital assets, EL7 data showed bitcoin closing at $79,752.01 on October 27, compared with $84,093.42 on October 21.
After the October decision, attention turns to September personal consumption expenditures data and the advance estimate of third-quarter gross domestic product, both scheduled for release on October 29. Alphabet and Microsoft report quarterly results on Wednesday, Amazon on Thursday, while about one in three S&P 500 companies are expected to report during the week. The next Federal Open Market Committee meeting will take place on December 8 and 9, the date toward which rate-hike bets retained by the September minutes are focused. The Federal Reserve’s Productivity and Jobs team is scheduled to hold its first field session on November 16 in the San Francisco Bay Area to discuss the effects of AI and other technologies. Warsh previously linked AI to the potential for productivity growth in a speech, noting that the timing and scale of that effect remain open questions.