No changes are expected in the U.S. Federal Reserve’s benchmark interest rate at next week’s meeting. The market takes it for granted that the U.S. monetary authority will choose to leave its monetary policy unchanged, holding rates within the 3.75%–4.00% target range set following last month’s hike. According to asset management experts, the rationale is twofold: the proximity of the midterm elections and the ongoing economic resilience displayed by the United States.
“The proximity of the midterm elections, along with the need to evaluate the impact that the previous rate hike has had on the market, are among the most significant arguments for postponing a decision to raise rates again in October. Consequently, even though the September U.S. inflation print came in worse than expected across both headline and core metrics, it still appears too early to confirm an upward trend. Investors believe Warsh will opt to delay any hike until December, when the market anticipates another increase in the policy rate that will lift the target range to 4.00%–4.25%,” explains Cristina Gavín Moreno, Head of Fixed Income at Ibercaja Gestión.
Between Statements and Data
Furthermore, as Kish Pathak, fixed-income research analyst at MFS IM, and Erik Weisman, chief economist and portfolio manager at MFS IM, recall, comments from Vice Chairs Williams and Jefferson revealed no intention to raise rates this month. Christopher Waller stated that hikes “do not necessarily have to happen at consecutive meetings,” and Bowman sees no urgency to act. Finally, Warsh’s remarks in Bangkok were notable for what went unsaid: he did not repeat the forceful anti-inflation message delivered at Jackson Hole.
“Data published since the last meeting supports the view that the labor market remains in good shape and that inflation is still too elevated for comfort. At the same time, Warsh has favored focusing on broader trends. A single additional month of data does little to determine whether the trend is shifting, which is why he has advocated for reducing the number of FOMC meetings. The nature of the risks confronting the economy also counsels patience. For instance, latent inflationary pressures will ease if some resolution to the war involving Iran is reached and energy prices retreat. The economy has proven resilient amid the oil crisis thanks to robust capital expenditure linked to artificial intelligence and the wealth effect generated by equities. If the recent volatility in AI-related stocks worsens, growth could lose momentum. By December, there will be more visibility on both fronts,” argue the MFS IM experts.
Bank of America (BofA) economists take a more critical view of the headline U.S. economic data, acknowledging that while there are “strong arguments for raising rates, there are substantial hurdles to executing it.” They maintain their forecast that the Fed will raise interest rates by 25 basis points, although they recognize it will be a difficult decision to implement given market developments over the past week. “September inflation, coming in well above expectations, bolsters the case for an October hike. The October decision will test Fed Chair Kevin Warsh’s resolve to introduce a radical shift in the institution’s forward guidance. If the Fed raises rates, fears of excessive monetary tightening could emerge; if it holds rates unchanged, markets might question its credibility,” they state.
A New Way of Communicating
Thus, according to market experts, the primary focus of next week’s meeting lies in the Fed Chair’s assessment of the condition of the U.S. economy. “Even if he does not deliver formal forward guidance, he can certainly offer clues about what to expect—not so much for the remainder of this year, where the market already prices in a December hike, but looking ahead to 2027. If consumer strength persists and inflationary pressures become entrenched, that could lead to two additional hikes next year,” Gavín notes.
According to Christian Scherrmann, Chief U.S. Economist at DWS, in one of his rare public appearances outside the post-FOMC press conference, the Fed Chair refrained from commenting on the monetary policy outlook. “This was widely interpreted as a signal that the Fed will maintain the status quo, likely referencing his Jackson Hole remarks prior to the last rate increase. However, other Fed officials continue to send mixed signals. For example, Governor Christopher Waller still entertains the possibility of further hikes, even as higher Treasury yields tighten financial conditions. Vice Chair Philip Jefferson advocates for patience, while Governor Michelle Bowman sees little urgency to act. Others, such as Austan Goolsbee, Beth Hammack, John Williams, and Susan Collins, worry that inflation could prove stickier than expected. This divergence of views suggests the committee itself is divided over whether policy is already restrictive enough. In any case, central bankers have become more active in recent months rather than less, contrary to what Chair Warsh suggested. We interpret this as a sign of an engaged FOMC, which in our view reinforces the institution’s independence,” Scherrmann emphasizes.
For François Rimeu, Senior Strategist at Crédit Mutuel AM, although he agrees with fellow analysts that forward guidance has fallen out of favor, close attention must be paid to Warsh’s remarks during the ensuing press conference. “The official statement is likely to remain largely unchanged from September: solid growth, a stable labor market without wage pressures, elevated inflation, and a reaffirmed commitment to price stability. In the press conference, Chair Warsh is expected to maintain his stance of avoiding guidance on the future path of interest rates,” he adds.
