The Federal Reserve is widely expected to keep interest rates unchanged at 3.75–4.00% at tomorrow’s FOMC meeting, with markets pricing a 90% probability of a hold. With limited changes expected to the policy statement, the focus will be on Fed Chair Warsh’s press conference.
Despite higher September inflation data strengthening the case for further tightening, key Fed members have signalled little urgency to deliver a back-to-back rate hike in October. A hawkish hold remains the base case as the debate centres around the timing and extent of further tightening rather than direction.
Warsh is expected to reiterate that monetary policy is not sufficiently restrictive and that additional tightening is warranted. He’s also seen reaffirming the commitment to price stability but cautioning against overreacting to individual data points.
Markets are already pricing an 80% chance of a rate hike in December, so the focus will be more on the 2027 outlook. Traders see roughly two more rate hikes next year, with the first fully priced in move in April.
A surprise rate hike would trigger strong risk-off flows, particularly in equities and crypto markets. The US dollar and Treasury yields might initially react positively to the decision, but I think the reaction will be quickly faded as growth concerns should intensify amid falling stock markets.
A largely neutral outcome that avoids signalling an imminent rate hike could be taken as dovish and trigger a relief rally in risk assets. I would also expect the same reaction but with less magnitude in case the Fed just delivers on the hawkish hold expectations, avoiding major surprises.
With no new projections or dot plot expected at this meeting, changes in Warsh’s or statement’s language will be the main focus.
This article was written by Giuseppe Dellamotta at investinglive.com.