Fed Likely to Hold in October, Expected to Hike in December - ING

Despite recent upside surprises in inflation data, markets and economists have reached a consensus that the Federal Reserve will hold interest rates steady at the Federal Open Market Committee (FOMC) meeting on October 28. Analysts at ING note that declining inflation diffusion and a cooling U.S. labor market provide policymakers with a window to continue observing, but elevated price pressures remain a concern, leading the firm to judge that the Fed will resume rate hikes in December.

**Pausing hikes to buy observation time**

September core CPI rose 0.3% month-over-month, exceeding market expectations, briefly pushing market odds of an October hike above 50%. However, this sentiment did not persist. Several Fed officials subsequently signaled that there was no need to rush monetary policy adjustments, quickly calming market jitters. Fed Chair Kevin Warsh's remarks at the International Monetary Fund meeting in Bangkok did not emphasize the possibility of an immediate hike, a stark contrast to his hawkish stance at the Jackson Hole meeting before the September hike, further dampening market expectations for an October move.

**Inflation and employment data support a wait-and-see stance**

ING believes that while the economy continues to expand solidly and inflation remains above target, recent employment data has been disappointing, and rate-sensitive sectors such as housing are facing growing pressure. These signs indicate that the effects of tightening are emerging, giving the Fed reason to wait. However, Fed officials have clearly signaled that further monetary policy tightening is needed to bring inflation down. The latest Summary of Economic Projections shows that four FOMC members expect cumulative rate hikes of 50 basis points from now through year-end, suggesting that the decision to hold in October may not be unanimous.

**December hike expectations rise**

TD Securities strategists also expect the Fed to hold the federal funds rate at 4.00% at the October meeting and believe this pause will increase the likelihood of hikes in December and March next year. They also warn that a single unfavorable inflation report could force the Fed to tighten earlier and more aggressively. ING, meanwhile, expects Fed Chair Warsh to maintain a matter-of-fact communication style, signaling that policy changes will be guided by upcoming data, while officials currently see more work ahead.