By Expectations that the Federal Reserve will hold interest rates steady at its October meeting surged on Friday, even as persistent inflation and strong economic data continued to complicate the outlook for monetary policy.
CME FedWatch data showed an 85.1% probability of the Fed leaving rates unchanged at its next meeting. That was up from around 72% a day earlier and close to an even split about a month ago.
The shift in expectations comes as investors weigh fresh inflation data against the possibility of further monetary tightening. Fed Chair Kevin Warsh, meanwhile, declined to indicate which way policymakers were leaning ahead of the upcoming decision.
The Federal Reserve raised rates by 25 basis points last month, taking its benchmark rate to a range of 3.75%-4.00%. The September move was its first rate increase in three years.
What did Warsh say?
Speaking at the International Monetary Fund and World Bank annual meetings in Bangkok on Friday, Warsh maintained his stance of avoiding advance signals about the Fed’s interest-rate decisions.
“I don’t prejudge meetings,” Warsh said during a discussion with IMF Managing Director Kristalina Georgieva. “I don’t believe in saying now what I might do at the meetings that we have in the balance of this year.”
However, he reiterated the central bank’s commitment to bringing inflation under control, referring to last month’s rate increase as a move toward tighter monetary policy.
"We made very clear that we would deliver price stability, and we removed a dose of accommodation about a month ago."
Warsh’s comments leave the October decision open, with policymakers continuing to assess incoming data as they balance inflation risks against broader economic conditions.
Inflation data complicates outlook
The Fed faces a challenging environment as price pressures remain elevated, partly because of persistently high energy costs.
Wednesday’s consumer price index report showed headline inflation at 3.7% annually, while core inflation reached 2.6%. Both readings were slightly above expectations, initially raising the likelihood of another rate increase in October before those odds eased on Thursday.
The producer price index added to concerns about persistent inflation. Wholesale prices rose 1.3% in September and increased 6.3% from a year earlier, marking the largest annual increase since December 2022.
Retail sales also came in stronger than expected, advancing 0.8% against economists’ consensus forecast of 0.3%.
The combination of higher producer prices and resilient consumer spending has reinforced concerns that inflation could remain difficult to contain. However, the latest figures have not prevented markets from increasingly pricing in an October pause.
December hike likely
While expectations for an October rate increase have declined, markets continue to anticipate further tightening before the end of the year.
CME FedWatch data indicated an approximately 88.9% probability of a rate increase at the Fed’s December 9 meeting, up from 83% a week earlier.
UBS Global Wealth Management has also revised its forecast, expecting the Fed to extend its tightening cycle into 2027.
In a research note led by economist Andrew Dubinsky, UBS projected a quarter-point rate increase in December, followed by another 25-basis-point hike in March 2027.
The bank expects policymakers to pause after the March increase to assess the cumulative impact of higher interest rates.
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