The US Federal Reserve is meeting this week to set benchmark rates, and the consensus is that the Fed will hold rates for now, with the possibility of a rate hike before year-end. The decision comes at a key political moment, with midterm elections next week. These elections will determine control of Congress and the Trump administration’s ability to push legislation through the House and the Senate.
The current benchmark rate stands at 3.75%. The odds of an increase at this meeting stand at around 8%, but the story flips as a hike in December is now pegged at over 80%.
Meanwhile, the cost of living has emerged as a top issue in the elections as the price of petroleum remains high, mainly due to the war with Iran, and some tariffs have filtered through the system to land in the wallets of consumers.
Matthew Ryan, Head of Market Strategy at global financial services firm Ebury, says the dollar has gained this week while investors anticipate a hawkish tone from the Fed’s Federal Open Market Committee (FOMC) decision.
“We see no chance of any change in rates: since the hot September CPI data, a number of Fed officials have all played down the need to tighten just yet, and futures now see less than a one-in-ten chance of a hike. Data since the last meeting has also been mixed. Core PCE came in softer than expected, growth in payrolls has slowed, wage pressures have eased and higher Treasury yields have continued to do some of the Fed’s work for it. We are not, however, necessarily expecting a unanimous vote. One or all of Hammack, Kashkari or Logan – the three arch hawks on the committee – could favour a hike, despite recent cautious voiced by the latter two. There is no dot plot this month, so the focus will be on the tone of Chair Warsh’s presser. We expect him to say the economy is solid and inflation is too high, without giving explicit guidance.”
As do others, Ryan expects a December hike, driven by the data. He adds that markets have done some of the Fed’s work as the ten-year moved above 5% before retreating.
“The French bond rout and the wobbles in AI-related stocks have added to the sense of fragility in markets worldwide. This is not an obvious moment for the Fed to risk compounding a sell-off, and with the midterms a week away, we think most of the committee will be happy to wait. There will be no new dot plot or economic projections this month, so the focus will fall on the tone of the Fed’s communications. The message will probably be that the economy is in decent shape, inflation is too high, and more work needs to be done to return it to target in a timely manner.”
The Fed will announce its decision at 2 PM ET today.
