The Federal Reserve is widely expected to leave interest rates unchanged on Wednesday, pausing a tightening campaign that began only last month. Investors, meanwhile, are already looking past the meeting toward another increase in December.
Policymakers conclude a two-day meeting today, with the decision due at 2 p.m. Eastern Time (1800 GMT). The benchmark federal funds rate stands at 3.75% to 4.00%. The central bank lifted it by a quarter of a percentage point in September, its first increase since 2023. All 12 voting members backed that move. Earlier in the year, the Fed had held rates at 3.50% to 3.75%.
A pause rather than a pivot
Futures markets put the probability of no change at roughly 90% going into the meeting, according to the CME Group’s FedWatch tool. A Reuters survey of 100 economists, carried out between October 16 and 20, found 94 expecting the Fed to stand still.
Timing may be part of the calculation. The decision falls six days before the US midterm elections. Heather Long, chief economist at Navy Federal Credit Union, has argued that policymakers are unlikely to raise borrowing costs so close to a vote. The Fed maintains that it sets policy independently of the political calendar.
No new economic projections are scheduled for this meeting. The next set arrives with the December 8-9 gathering. That leaves investors to parse the policy statement, any dissenting votes and the press conference by Chair Kevin Warsh.
Inflation and energy prices keep the pressure on
A hold does not mean the debate is over. Inflation ran at 3.7% in the year to September, up from 3.4% in the previous reading and well above the Fed’s 2% target. Unemployment edged up to 4.2% from 4.1%, a sign that the labour market is cooling only modestly.
Energy is a major driver. The Middle East conflict, now nearly eight months old, has pushed oil prices higher and fed through to household budgets. Crude slipped below $114 a barrel on Tuesday as diplomatic efforts raised hopes of calmer tensions. That left prices below the near six-month highs reached recently, but attacks on Saudi energy infrastructure have kept supply fears alive.
Minutes from the September meeting showed that most participants thought another increase could be appropriate before the end of the year. Roger Ferguson, a former Fed vice chair, has said the central bank will probably need two more hikes to bring inflation under control. Long has said price pressures appear to be spreading beyond energy.
What markets want to hear
Traders are pricing in a December increase. Today they will be listening for wording, or remarks from Warsh, that confirms the pause is temporary. The ideal signal for markets would be guidance that the Fed is ready to act again without committing to a date.
Asset prices show how sensitive investors are. The S&P 500 closed Tuesday at 7,722.60, within about 1.2% of its record high. Gold eased toward $4,010 an ounce as traders waited for the announcement. A more hawkish tone could push Treasury yields higher and weigh on the technology shares that have driven this month’s recovery.
Canada may move first
Across the border, the Bank of Canada announces its own decision at 9:45 a.m. Eastern, ahead of the Fed. Markets assign roughly an 80% chance to a quarter-point rise in its overnight rate to 2.50% from 2.25%. That would be its first hike since July 2023.
A Reuters poll found most economists expect that outcome, after Governor Tiff Macklem’s remarks at the weekend were read as a hint. Canadian inflation reached 3.1% in September. The bank’s quarterly forecasts, published alongside the decision, are expected to be revised higher.
The European Central Bank and the Bank of Japan also meet this week, and economists expect both to hold. The Bank of Japan is widely expected on Friday to say it has all but reached its 2% inflation goal. That would leave the door open to a rate increase as early as December.
What it means for households
A hold will not make borrowing cheaper. Fixed mortgage rates follow longer-term Treasury yields and lender funding costs more closely than the overnight policy rate, and those yields have been pushed up by inflation worries. Products tied to short-term rates, including credit cards and home equity lines, would feel a rate increase more directly.
The decision also arrives just hours before Microsoft and Alphabet report quarterly results after the US market close. Traders will therefore get a read on borrowing costs and on the companies financing the technology build-out within a single session.
