No rate hike in October, another move in December? Fed's "slow rate hike" path against inflation emerges, all eyes on Waller's speech next week

According to Zhicho Finance APP, the Federal Reserve will announce its latest interest rate decision next Wednesday. The market generally expects the central bank to keep the federal funds rate unchanged, which would signal patience in its fight against inflation. Based on CME Group’s FedWatch tool, financial markets currently believe that the probability of the Federal Open Market Committee (FOMC) voting to increase the federal funds rate by 25 basis points at Wednesday’s meeting is only one in ten.

In recent weeks, Federal Reserve officials have publicly discussed whether to follow up September’s 25-basis-point rate hike to respond to higher-than-expected inflation. While some Fed officials have expressed concerns, others advocate for a wait-and-see approach. Recently, two key FOMC members—Fed Governor Bowman and New York Fed President Williams—have made remarks indicating they do not support raising rates at two consecutive meetings.

The Federal Reserve is working to balance its dual mandate from Congress: maintaining low inflation and high employment. Inflation has been above the Fed’s target for five consecutive years while the unemployment rate remains near historic lows. Higher federal funds rates mean increased borrowing costs for various types of loans, which could suppress spending and lower inflation. However, this could also put pressure on the labor market and the broader economy.

Most experts anticipate that even if the Fed forgoes a rate hike in October, it will raise rates again in December. Michael Pearce, Chief US Economist at Oxford Economics, wrote in a commentary, “All signs point to the Fed needing to continue raising rates in the near term, but comments from several key officials suggest they are unlikely to take this action at the October policy meeting.”

If the Fed pauses its rate hikes in October, it would give officials more time to assess the extent to which rising fuel prices caused by the Middle East war will push up inflation before deciding whether to take further action.

David Mericle, Chief US Economist at Goldman Sachs, wrote in a commentary that recent remarks from Fed officials indicate most would support raising rates by 25 basis points every other meeting, which would mean the next two hikes would come in December and March of next year.

Aside from the rate decision, the main focus of Wednesday’s Federal Reserve meeting will be Chairman Wosh’s press conference. However, if he continues his usual practice, he will avoid providing any hints about future monetary policy decisions. Unlike previous Fed Chairs, Wosh has consistently refused to offer financial markets “forward guidance” on policy.

Nevertheless, even Wosh’s most obscure remarks may provide some clues. Nomura Securities economist Ruchir Sharma wrote in a commentary, “Wosh is unlikely to offer any direct forward guidance during the press conference, but we expect he will subtly support a rate hike in December. His description of recent inflation data and market financial conditions could provide some hints about the threshold for further tightening policy in 2027.”