Fed issues hawkish pre-midterm October rate hold

The Federal Reserve hit the pause button Wednesday, holding the interest rate steady despite the ongoing pressures of elevated inflation.

In September 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. 

Recent inflation data, which has come in hotter than expected, was seen as increasing the pressure on the Fed to increase rates. However, the Federal Reserve, led by Chair Kevin Warsh, opted to keep interest rates at 3.75% to 4% in its latest decision.

"Economic activity is expanding at a strong pace," the FOMC statement released on Wednesday read. "While uncertainty remains elevated owing, in part, to geopolitical developments, domestic spending has been resilient."

The Fed committee described productivity growth as "strong"; jobs, it said, has shown gains keeping pace with the workforce, while the unemployment rate has hardly changed.

While inflation is still elevated, it said "more information will help the Committee determine the policy stance appropriate to ensure a timely return ... the Committee's 2 percent goal" in support of price stability.

Dissenting against the decision were Fed Governor Lisa Cook and Clevelnad Fed President Beth Hammack, who both said a 0.25 bps move at this point would be preferable.

The move on Wednesday was not completely out of the blue. Market watchers this week said that an October rate hike was unlikely, citing the looming midterm elections, and credit conditions in the bond market.

All eyes are now on the next meeting of the Federal Open Market Committee, which takes place in December.

In the immediate wake of the October meeting hold, the CME's FedWatch tool puts the odds of a December rate hike at between 4% and 4.25% at 81.4%, up from 75.1% on Tuesday morning. The odds of a hike to between 4.25% and 4.5% are 6.2%, compared to 7.6% a day earlier.

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

Things have played out as expected by Omar Aguilar, CEO and CIO of Schwab Asset Management, who spoke to InvestmentNews immediately before the Fed's Wednesday decision.

"Our expectation was that they're going to be pausing for now and their next move will likely be December," Aguilar said from the sidelines of the Schwab IMPACT conference in Boston. "We will expect another rate hike in 2027 – so it will be two more – and then they will pause."

Aguilar said the much of the Fed's decision-making on rates now is motivated by keeping inflation lower, particularly waiting to see whether oil prices would turn outto be less of an issue heading into next year. 

"CPI and PPI numbers probably gave them enough support for the move in December and into next year," Aguilar said. "After that, it's going to be a function on how the long-term inflation numbers look like."

Jeffrey Roach, LPL's chief economist, says strong demand and supply constraints are both feeding into the Fed' inflation dilemma.

"The challenge for policy makers right now is managing the view that this short-term demand push will be appeased by a disinflationary productivity boost in the future," Roach said. "The problem is the productivity boost will not show up as quickly as some think."

Nigel Green, CEO of the deVere Group, sees the Fed's non-move on Wednesday as a dangerous gamble with inflation.

"Prices are rising at almost twice the Fed’s target, and it’s chosen to sit on its hands," Green said. "We believe the Fed will likely have to hike again before the year is out anyway. So why wait it out?

“Stalling for the midterms, which is what has happened, we assume, makes no sense when the world’s largest economy is on the line,” he added.

Green drew a directl line between today's inflation environment and 2021, when the Fed opted to stay its hand on rates while insisting inflation was transitory. By the time it moved in March 2022, prices were already galloping upward at a nearly 8% clip.

"The Fed was asleep at the wheel, and families paid for it at the checkout, at the pump and on their mortgages," Green said. "It took two painful years to rebuild credibility. Throwing that away somehow seems reckless.”