A December rate
increase remains the market’s expected outcome. Investing.com’s rate
monitor put the probability of a quarter-percentage-point increase at about 80%
on 4 November. Another hold would depart from that expectation, making
the evidence that might persuade the Federal Reserve to wait particularly
relevant for traders.
The Fed raised its
benchmark rate to 3.75–4% in September and left it unchanged on 28
October. Dallas Fed President Lorie Logan supported the hold, then argued two
days later for at least two more quarter-point increases. Her position
illustrates how officials can favour further tightening while allowing
more time between decisions.
A similar pause came
in June 2023, when the Fed held rates to assess incoming information and
earlier tightening before raising them again in July. This time, the case for
waiting depends on whether inflation continues to ease and subdued hiring
develops into broader employment weakness.
Inflation Has Eased
Unevenly
The Personal
Consumption Expenditures (PCE) price index rose 3.6% between September
2025 and September 2026, above the Fed’s 2% annual inflation target. Prices
excluding food and energy, known as core inflation, increased 0.3% in
both August and September 2026.
Across the third
quarter of 2026, however, core inflation slowed to an annualised 2.5%,
from 3.3% in the second quarter. These figures express each quarter’s
price increases as an annual rate. They show improvement over the broader
period, while the latest monthly readings leave its durability open to
question.
Energy prices add
uncertainty. EBC analyst Edgar
Peredo identifies disruption around the Strait of Hormuz as a potential
source of persistent inflation, as higher fuel costs feed into transport
and production. Oil nevertheless fell more than 8% on 4 November as
investors assessed prospects for Middle East peace following the US
elections.
Democrats won both
chambers of Congress and will take control in January. The result prompted investors to reassess
the outlook for the conflict and future government spending, although the
legislative consequences remain ahead. Sustained lower oil prices would
help ease inflation pressure; renewed supply disruption would threaten
that relief.
October’s consumer
inflation report, due on 10 November, will provide the next major update
on prices. Several softer readings would make a stronger case for patience than
a short-lived decline in oil alone.
Slower Hiring Could
Strengthen the Case for Waiting
Payrolls increased by
29,000 in September 2026, while July and August’s combined gains were
revised down by 60,000. Unemployment edged up to 4.2% from 4.1% in
August, although it remained within the narrow range recorded since
March.
Fed Chair Kevin Warsh
offered a more reassuring assessment at his October press conference,
pointing to low unemployment insurance claims. The October jobs report,
scheduled for 6 November, will help establish whether September’s subdued hiring
continued.
Further weak hiring
alongside rising unemployment would increase the risk that higher
borrowing costs deepen a slowdown. Steadier employment would give officials
more scope
to respond to
persistent inflation. The distinction is important for December: a
resilient labour market makes an increase easier to absorb, while the
inflation outlook determines whether further restraint is
warranted.
Borrowing
Conditions Remain Uneven
Warsh said financial
and credit conditions had tightened for some households and businesses
since September’s increase. His assessment distinguished that recent
tightening from the overall level of borrowing conditions. The Fed’s October
lending survey provides a similarly mixed picture: standards tightened
for small-business and commercial property loans, while those for large
and medium-sized business loans were broadly unchanged.
Business loan demand
weakened partly because companies needed less financing for investment
and partly because they found more attractive funding elsewhere. Some
borrowers are reducing their investment needs, while others are changing
lenders. Broader evidence of declining investment and hiring would
strengthen the argument for allowing September’s increase more time to
work.
What Bond Yields
Mean for the Dollar and Gold
Peredo emphasises that
gold’s response to weaker employment also depends on bond yields, the
dollar, and investor demand. Each can change for reasons beyond the next
Fed decision.
The market moves on 4
November provide a recent example. Gold rose 2.2% by 06:19 GMT as the
dollar weakened and Treasury yields declined. Later that day, Reuters reported
the benchmark 10-year Treasury yield at 4.89%, down about six basis
points. These were readings from different points in the session, but
both reports described support for bonds as investors reassessed the
outlook after the election.
Lower expected US
interest rates generally weaken support for the dollar. For gold, falling
bond yields after allowing for expected inflation reduce the appeal of
interest-paying alternatives. Longer-term yields also reflect inflation
and government borrowing expectations, so their response can differ from
changes in the probability of a December increase.
A hold would become
more plausible if easing inflation were accompanied by broader employment
weakness. Whether that shift supported gold would also depend on the
response of bond yields and the dollar. Traders therefore have two related developments
to assess: the evidence shaping the Fed’s decision and the returns
available elsewhere in financial markets.
This article was written by IL Contributors at investinglive.com.