Markets overwhelmingly expect no change in benchmark rates when the Fed releases its decision Wednesday. The focus is on Chairman Kevin Warsh and whether he signals more hikes, while economists disagree over whether the Fed should tighten at all.
Federal Reserve officials head into this week's meeting with no change in benchmark rates expected, following September's quarter percentage point increase. Investors will look for clues about future moves from Warsh in particular.
That is difficult, because Warsh has said he is highly reluctant to signal future policy, moving the Fed away from forward guidance. Deutsche Bank's Brett Ryan wrote that the chairman is likely to signal that further tightening will likely be needed over time.
Inflation data leaves little room
The September consumer price index showed an annual rate of 3.7%, driven largely by soaring energy prices. Core CPI pointed to 2.6%, up 0.3 percentage points from August and above the Fed's 2% mandate.
Meanwhile, housing is struggling with mortgage rates above 7%. The labor market has settled into a low-hire pattern in which layoffs are around their lowest levels since the late 1960s, according to CNBC.
Execution risk and a split among economists
Signaling tighter policy could strain housing and the labor market. According to Evercore ISI's Krishna Guha: "But there is material execution risk."
Guha also said the Fed will add more hikes if inflation continues to disappoint or growth momentum fails to moderate. Citigroup economists, by contrast, think easing inflation data could let the Fed stay on hold and perhaps begin cutting next year, though the firm forecasts a hike this December.
Allianz's Mohamed El-Erian said he expects further increases but believes they are a mistake because they will hurt areas such as housing.
Futures price a December hike
Fed funds futures point to about a 10% chance of a rate hike this week and better than 80% odds of an increase in December, according to CME Group's FedWatch tool. The market also sees the likelihood of another hike in March 2027, then about a 50-50 chance of a final move before the end of next year.
Source: CNBC
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