Fed Expected to Pause in October Amid Inflation and Political Tensions

Key points

• The Federal Open Market Committee is set to meet on October 28, with markets pricing only a 9% probability of a rate hike, according to LSEG data.
• Inflation rose to 3.7% in September, up from 3.4% in August, remaining well above the Fed’s 2% target, driven by high energy costs from the Iran conflict.
• Most economists and traders expect the Fed to pause in October and raise rates by 25 basis points in December, allowing time to assess the impact of the September hike.
• Fed Chair Kevin Warsh has provided limited forward guidance, increasing market volatility, while President Trump continues to pressure the Fed for lower rates and has targeted officials Lisa Cook and Jerome Powell.
• The ECB is expected to hold its deposit rate at 2.5% on October 24, with concerns over French bond yields above 5% influencing policy decisions, and the Bank of Japan is likely to maintain its 1.25% rate, with a possible hike in December.

Background

In September 2026, the Fed raised rates for the first time in three years to 3.75%-4.0% to combat inflation, which had reached a three-year high of 3.9% in May. This followed a period of global bond market turmoil, with US Treasury yields at multi-decade highs and European yields spiking, particularly in France and Italy. The Fed’s move was seen as a hawkish response to persistent inflation, but concerns remain about the impact of energy prices and geopolitical tensions, including the Iran conflict, on future policy decisions.

How outlets are covering it

The Financial Times highlights the lack of forward guidance from Fed Chair Kevin Warsh as a source of market volatility, with traders expecting two to three rate hikes by the end of 2027. Invesco’s Rob Waldner argues that rate hikes will not address commodity-driven inflation, particularly from oil and energy costs. Yahoo Finance emphasizes the political dimension, noting that the Fed’s decision comes days before US midterm elections, with former Cleveland Fed head Loretta Mester arguing that the Fed’s decisions are based on economics, not politics, but acknowledging that some policymakers may avoid a hike to sidestep political scrutiny. USA Today presents a balanced view, noting that while most economists expect a pause, some Fed officials, including Cleveland Fed President Beth Hammack, warn that persistent inflation could become entrenched, supporting a case for a hike. The outlet also highlights Trump’s ongoing efforts to remove Fed members Lisa Cook and Jerome Powell, adding political pressure to the decision-making process. The ECB and Bank of Japan are also facing similar dilemmas, with the ECB weighing the impact of French bond yields on its policy stance and the Bank of Japan considering a hike in December despite high oil prices.

Why it matters

The Fed’s decision will influence global financial markets, borrowing costs, and inflation expectations. A pause in October could signal caution amid uncertain economic conditions, while a hike could exacerbate political tensions and market volatility. The outcome will also affect the ECB and Bank of Japan, which are facing similar challenges with inflation and geopolitical risks. For voters, the Fed’s decision could impact the cost of living, influencing the outcome of the US midterm elections.

What to watch

The Fed will announce its decision on October 28, with markets expecting a pause. If the Fed holds rates steady, it may signal a more cautious approach to inflation, with a potential hike in December. If it hikes, it could signal a more aggressive stance, potentially increasing political pressure on the Fed. The ECB will announce its decision on October 24, with markets expecting a hold, and the Bank of Japan will announce its decision on October 25, with a possible hike in December. The outcome of the US midterm elections on November 3 could also influence the Fed’s future decisions, as the new Congress may have a say in Fed leadership and policy.