Fed likely to hold this week, but December hike odds top 70%

The Federal Reserve heads into this week’s meeting caught between hot inflation data and a midterm election just six days away, and most market watchers expect it to hold fire for now – but a December hike is another matter.

Last month the Fed raised interest rates for the first time since July 2023 in a unanimous 12-0 vote. The move also saw the central bank defy months of pressure from President Donald Trump to make a cut. The FOMC's latest statement is expected Wednesday at 2 p.m. ET.

Minutes from the Federal Open Market Committee’s September meeting showed most officials expected another hike before year-end.

Hot inflation data

The latest inflation data, which came in hotter than expected earlier this month, was also seen as increasing the pressure on the Fed to increase rates.

But Melissa Cohn, regional vice president of William Raveis Mortgage, thinks it is quite likely that the Fed will hold rates steady this week, noting that the latest FOMC meeting comes just days before the Nov. 3 midterms. “It’s a week before the election,” she said. “They’re facing a massive conundrum: a major equities meltdown, weaker economic data, and oil prices that keep rising.”

“I think that if oil prices continue to soar, then the Fed should be raising rates in December,” she added.

Like Cohn, Richard Saperstein, chief investment officer at investment firm Treasury Partners, doesn’t think that another rate hike is looming this week. “We don’t expect a Fed rate hike on Wednesday, as the bond market has already tightened credit conditions since the Fed’s last meeting,” he said. “We expect to hear tough talk on the inflation front combined with soft action, as uncertainty on the direction of inflation doesn’t warrant more tightening.”

As of Monday afternoon, the CME's FedWatch tool puts the odds of a quarter-point hike this week at just 10.5%, down from 33.8% on Oct. 14. For the December meeting, markets see a 73.1% chance that rates will be between 4% and 4.25% and an 8.3% chance of a raise to between 4.25% and 4.5%, which puts the odds of at least one hike by year-end at over 80%.

Geopolitical factors

But Chris Tessin, founder and managing partner of Acuitas Investments, told InvestmentNews that he doesn’t think we’re in the midst of a run of Fed rate hikes.

“The Fed has been very active against inflation that's been driven by geopolitical events where there's potential for a resolution,” he said. “But the fact is we could be in a very different place in short order, just like we were at the beginning of the year when everyone was talking about lower rates.”

Inflation, he noted, has been largely driven by higher energy prices and also the buildout of AI and other factors. “So much of it is energy-related that I question whether we're in a longer cycle of Fed hikes,” he told InvestmentNews.

“The Fed is going to react to the data, but the fact is the data is a function of potentially a geopolitical event,” Tessin added. “It's worth being aware as an investor that the environment could change markedly in pretty short order as far as rate expectations.”

For advisors, the takeaway is not to build portfolios around a single path for rates. Markets are pricing in a more than 80% chance of at least one hike by December, but if Tessin is right that much of the inflation pressure stems from energy prices and geopolitical events that could ease quickly, Wednesday’s statement and the chair’s comments on the inflation outlook may matter more for client positioning than the rate decision itself.