Fed Expected to Hold Rates Before Midterms, with December Hike Likely

Key points

• The Fed is expected to hold rates steady at 3.75% to 4.0% on October 28, with CME FedWatch tools showing an 88-90% probability of no change.
• September CPI rose 3.7% annually, with gasoline prices accounting for more than half the increase, but core inflation rose 2.6%, signaling potential broader price pressures.
• Three regional Fed presidents—Beth Hammack, Lorie Logan, and Neel Kashkari—are expected to dissent, favoring a 25-basis-point hike, while others like John Williams support a wait-and-see approach.
• Fed Chair Kevin Warsh is expected to hold a brief press conference, focusing on inflation trends rather than single data points, and avoiding forward guidance to maintain flexibility.
• A December hike is likely, with a 71-75% probability, but contingent on encouraging inflation data and growth concerns; some economists warn of multiple hikes in 2027 if inflation remains broad-based.

Background

The Fed raised rates by 25 basis points in September 2026, its first hike in three years, defying President Trump's preferences for lower rates. This move tested Fed unity and Warsh's leadership, as he prioritized combating inflation over political pressure. Prior to this, Natixis forecasted a single hike for the cycle, assuming inflation would moderate. The current meeting occurs amid rising mortgage rates (30-year average at 7.32%) and high diesel costs ($6.35/gallon), which have increased shipping and consumer costs. The Fed's independence remains a key concern, with Trump renewing efforts to fire Fed governor Lisa Cook and criticizing the committee as 'hostile.'

How outlets are covering it

Natixis economists Christopher Hodge and Selin Aker expect the Fed to hold rates but anticipate three hawkish dissents (Logan, Hammack, Kashkari) and a single December hike, assuming acyclical inflation drivers wane. They view Warsh's press conference as a signal of flexibility, not dovishness. In contrast, Fox Business's Heather Long emphasizes that while October data may be cooler, the Fed must act again in December, warning of multiple hikes in 2027 if inflation remains broad-based (e.g., used cars, airfares). CBS News and Pittsburgh Post-Gazette highlight the political timing, with LaVorgna noting the Fed avoids hikes before elections to prevent White House criticism. Bhave questions Warsh's stance on forward guidance, noting that recent speeches by officials resemble guidance, potentially undermining Warsh's credibility if he avoids a hike. All sources agree on the likelihood of a hold, but diverge on the urgency and scope of future hikes, with Natixis being more cautious and Long more hawkish.

Why it matters

The Fed's decision impacts borrowing costs, mortgage rates, and consumer confidence ahead of the midterm elections. A hold may ease short-term financial stress but risks allowing inflation to entrench, while a hike could slow growth but stabilize prices. Warsh's communication strategy and the committee's internal divisions will shape market expectations for 2027, influencing everything from housing affordability to business investment. The outcome also tests the Fed's independence amid political pressure, with implications for long-term monetary policy credibility.

What to watch

Investors will monitor Warsh's press conference for clues on inflation trends and financial conditions, particularly credit spreads and mortgage rates. The December 8-9 meeting will be critical, with a 71-75% probability of a 25-basis-point hike. Future CPI data, especially core inflation and energy costs, will determine if the Fed pauses or continues tightening. Markets will also watch for signs of broad-based inflation (e.g., services, used cars) and growth indicators, as slower growth could prompt caution. Warsh's stance on forward guidance and his interactions with the White House will remain key factors in assessing Fed independence and policy direction.