The expected pause comes with unfinished business
The Federal Reserve opened its two-day meeting Tuesday with investors widely expecting officials to leave interest rates unchanged. The harder question is how long that decision will last.
The benchmark range stands at 3.75%–4% following September’s quarter-point increase. Markets strongly favor a hold Wednesday, while expectations continue to lean toward another increase in December.
September’s median year-end rate projection of 4.1% was consistent with one additional quarter-point increase. Those projections represent officials’ individual assessments and can change as the economy evolves.
Our view is that the Fed can slow the pace of tightening while leaving considerable pressure on the economy. A pause gives officials time to assess September’s increase and higher market borrowing costs. It offers borrowers little immediate relief if the prospect of further hikes remains intact.
The inflation problem reaches beyond the fuel pump
September’s inflation figures make a comfortable pause harder to explain.
Consumer prices rose 0.6% during the month and 3.7% from a year earlier, accelerating from August’s 3.4% annual pace. Gasoline prices jumped 9.1%, accounting for more than half the monthly increase. But prices excluding food and energy also rose 0.3%, with increases across several spending categories.
Wholesale prices added another concern. Final-demand producer prices increased 1.3% in September, their largest monthly advance since March 2022. Even excluding food, energy and trade services, prices rose 0.5%.
Higher interest rates cannot restore disrupted oil supplies. They can restrain spending and investment, reducing businesses’ ability to pass rising costs through to customers.
That leaves policymakers weighing two risks: allowing inflation to become more persistent, or tightening enough to weaken demand unnecessarily.
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Borrowing costs have already moved ahead
The bond market provides part of the argument for waiting.
The rise in Treasury yields following September’s hike increased financing pressure before officials could make another decision. Some of those gains subsequently reversed, complicating the assessment of how much restraint markets are delivering.
Households are already encountering expensive credit. The average 30-year fixed mortgage rate was 7.32% on October 22, down slightly from 7.40% but well above the 6.19% recorded a year earlier.
For investors, this makes the response in bond yields especially relevant. An unchanged Fed rate does not guarantee lower mortgage rates, cheaper corporate financing or more generous stock valuations.
If Wednesday’s message reinforces expectations of persistent inflation and additional tightening, market borrowing costs could remain elevated through the pause.
Warsh must explain what would change the decision
Chair Kevin Warsh’s press conference carries extra weight because October’s meeting does not include new economic projections. Investors will have the policy statement, voting record and his explanation to assess.
Warsh’s preference for limiting advance commitments on interest rates suggests a firm December promise may be difficult to obtain. His assessment of inflation’s breadth and financial conditions could nevertheless reveal what would justify another increase.
The November 3 midterms add political scrutiny. Election timing alone, however, cannot establish the reason for a hold: the Fed raised rates on November 2, 2022, six days before that year’s midterms.
The economic calendar provides a more immediate test. Wednesday’s 2 p.m. Eastern decision and 2:30 p.m. press conference precede Thursday’s September PCE inflation report and first estimate of third-quarter GDP.
The market-moving development would be a change in the expected path of rates beyond October. Wednesday’s explanation will shape that outlook; Thursday’s numbers could immediately test it.
