Market Expectations for an October Hold
The Federal Reserve is widely expected to leave interest rates unchanged during its upcoming Oct. 27-28 meeting, according to futures-based estimates from CME FedWatch. These probabilities assign an 88% chance of a hold and a 12% chance of a quarter-point increase.
A UBS note published on Oct. 19 identified an unchanged October rate as its base case, followed by measured further tightening. The firm stated that financial markets were pricing a more aggressive tightening path than the bank expected.
The Fed’s upcoming meeting follows its September rate increase, which occurred amid renewed inflation pressures. That September decision was unanimous.
Inflation Data and Economic Indicators
Recent economic data highlights the competing forces facing policymakers. US consumer prices rose 0.6% in September from the previous month, lifting the annual headline inflation rate to 3.7% from 3.4%. Core CPI rose 0.3% monthly and 2.6% annually in September, up from 2.4% in August.
The Bureau of Labor Statistics reported that gasoline prices rose 9.1% in September. Additionally, a UBS note stated that September’s producer price increase of 1.3% was the largest in four and a half years, exceeding the 0.5% consensus forecast. The note indicated that prices were rising across a broader range of goods and services beyond energy.
Global commodity markets also reflect ongoing volatility. Brent crude was trading near $113 a barrel on Oct. 23 after a surge linked to renewed concerns about Middle East supply disruptions.
Signals from Federal Reserve Leadership
Investors will look to Chair Kevin Warsh for clues regarding conditions that could prompt another increase in December and whether the central bank is giving enough weight to employment risks. However, Warsh has indicated a reluctance to provide forward guidance.
Chair Kevin Warsh stated on Oct. 16 in Bangkok that he does not prejudge meetings and does not believe in saying now what he might do at future meetings, indicating an intent to avoid forward guidance.
Tracy Shuchart, Senior Economist at NinjaTrader, told Invezz that Warsh has been consistent in keeping the Fed out of the forward guidance business and will not submit a dot. Shuchart noted that anyone waiting for him to tee up December will be disappointed.
Labor Market Characterization
Patrick Boyle, a visiting professor of finance and former hedge fund manager, suggested investors watch how the Fed characterizes the labor market. He noted that a shift from "solid" to "softened" could indicate policymakers view weak September employment data as more than temporary noise.
Boyle also noted that while September’s decision was unanimous, a dissent in either direction at the October meeting would offer insight into the committee’s debate over December.
Inflation Trajectory Assessment
JoAnne Bianco, Senior Investment Strategist at BondBloxx, told Invezz that markets should focus on whether Chair Kevin Warsh characterizes inflation as a temporary setback or evidence that policy needs to become more restrictive.