What is on deck this week
Policymakers head into this meeting divided over how to tackle inflation that has not convincingly eased. After lifting rates by 0.25 percentage point in September, investors largely expect a hold on Wednesday and will scour the release for signals on what could come next, especially from Chairman Kevin Warsh.
Brett Ryan, Deutsche Bank's senior U.S. economist, said he will be watching what Warsh hints at next, noting the chair's push to move away from the forward guidance that dominated much of the 21st century. In a client note, Ryan wrote that the chairman "is likely to signal that recent inflation data reinforce expectations from the September meeting that further tightening will likely be needed over time," adding, "However, skipping October allows officials more time to assess trends in the data."
The data that is steering the discussion
Inflation has not offered much relief. The consumer price index showed a 3.7% annual pace in September, propelled largely by higher energy costs. Even excluding food and energy, core CPI landed at 2.6% and rose 0.3 percentage point from August, still above the Fed's 2% mandate.
With mortgage rates topping 7%, housing activity has sagged. Meanwhile, both hiring and firing are subdued, with layoffs near late-1960s lows, yet jobless individuals are having a hard time securing employment.
A pause now would give the Fed more time to see how September's hike is filtering into growth and financial conditions. But tilting harder toward tighter policy risks adding pressure to housing and employment. The Chicago Fed's financial conditions index has nudged tighter since the September move, reflecting stock market volatility among other forces.
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How officials and watchers see the path
Warsh has advocated a nimbler approach in which the Fed steers clear of laying out a path in advance and instead lets new data guide market expectations. Recent comments from Vice Chair Philip Jefferson and New York Fed President John Williams point to a tendency toward hikes at every other meeting, though how far the central bank ultimately needs to go is uncertain. Former Fed Vice Chair Richard Clarida said he expects one more increase in December.
On Monday, Krishna Guha of Evercore ISI, who heads the economics and central bank strategy team, cautioned that there is "material execution risk" as the Fed navigates its inflation and employment goals without much detail on the pace or degree of tightening. He read Warsh's recent remarks in Bangkok at World Bank and IMF events as aligned "with the central view" on the FOMC, describing a Fed that moves "at a deliberative and methodical baseline pace of once per quarter without prejudice to what it learns along the way and how far it might ultimately have to go and whether at some point later down the line it might need to speed up." If inflation keeps disappointing or growth does not moderate, he added, more hikes would follow.
Market odds and the outside view
Fed funds futures imply about a 10% chance of a hike this week and better than an 80% probability in December, according to CME's FedWatch tool. The market also assigns some chance to another increase in March 2027, and pegs the probability of one last move at roughly 50-50 before next year concludes.
Economists are split on whether the Fed should tighten at all. Citigroup's team expects inflation to ease in the months ahead, which they say would justify staying on hold and perhaps beginning cuts next year, though they still forecast a December hike. Allianz chief economic advisor Mohamed El-Erian said on CNBC's Squawk Box that he anticipates further increases but thinks they would be a mistake. "My sense is that the market is right in saying that they'll do nothing. [Warsh] will have to package it in quite a hawkish language because the [inflation] data all [have] come hotter than expected," he said. "My problem is that it's the wrong policy measure right now." He argued that to address concerns about inflation and higher Treasury yields, the answer is "fiscal containment, not monetary tightening," adding that more tightening would spare tech relative to "the rest of the economy: housing, consumer car loans, consumer loans."
What it means for your portfolio
The near term likely brings a hold paired with tough talk that keeps future hikes alive. That is why odds for this week are low while December looks live, with markets still leaving room for another move later.
The bottom line: the message may matter as much as the move. Watch for hints on whether officials see inflation bending back toward 2% or staying sticky, and whether they reinforce a roughly once per quarter tempo. Those clues will steer rate expectations and, with them, exposures tied to housing and consumer credit - with tech comparatively less in the crosshairs.
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