We expect the FOMC to hold the federal funds target range at 3.75–4.00 percent next week, but the risk of a 25 bp increase is materially higher than markets imply. Fed funds futures assign roughly a 17 percent probability to an October move; we place it nearer 25–35 percent. December remains the most likely date for the next increase.
The inflation data argue for acting sooner. Headline CPI rose 0.6 percent m/m in September, the largest monthly gain since April, lifting the annual rate to 3.7 percent from 3.4 percent in August. Energy is the main driver, with Brent crude trading near $100/bbl amid the Iran conflict, but underlying inflation is also firming. Core CPI has risen 0.32 percent and 0.34 percent in the past two months, an annualized pace of roughly 3.5–4.0 percent, and the September PPI also surprised to the upside. Expectations offer little comfort: the University of Michigan one-year measure has hovered near 4 percent and the long-run measure sits at 3.4 percent, well above its historical norm of about 2.8 percent. With inflation above target for a fifth consecutive year, the risk of expectations becoming unanchored is the central concern.
Activity data point the same way. Q3 GDP is tracking near 3 percent annualized, consistent with a positive output gap, and financial conditions remain supportive of demand even with the 10-year Treasury yield above 5 percent. Ethan Harris argues that the Committee has been too quick to label current policy restrictive, noting that “for anti-inflation policy to work it must turn restrictive.” In his latest commentary he goes further: “If I were on the FOMC I would be voting for a hike,” putting the odds of an October move at “more like 50-50.”
The labour market is the main argument for patience. Nonfarm payrolls rose only 29,000 in September against expectations near 90,000, with downward revisions to prior months, and the unemployment rate edged up to 4.2%. That said, the rise in unemployment was small (4.14 to 4.18 percent unrounded), and it does not yet signal a sharp deterioration in labour demand.
Committee dynamics favour a skip. The September Summary of Economic Projections showed most participants expecting one more hike in 2026, without agreement on timing, and Governor Waller has said hikes “do not need to come at consecutive meetings.” New York Fed President Williams sees “no need for urgency,” and Chair Warsh has declined to provide forward guidance. Most major dealers, including J.P. Morgan, Goldman Sachs and Morgan Stanley, have pushed their call to December, when updated projections will accompany the decision. Harris himself concludes that “this FOMC leans dovish,” expecting a skip in October and a terminal rate near 4.6 percent following a series of hikes beginning in December.
On balance, a hold with a hawkish statement is the base case. Hawkish dissents would firmly signal December, and the October hike risk should not be dismissed given the strength of the recent core inflation data.
Independent Opinion
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