Fed Is Expected to Hold Rates as Inflation Keeps December Hike in Play

Investors broadly expect the Federal Reserve to leave interest rates unchanged at its Oct. 27-28 meeting. Persistent inflation and the possibility of another increase in December put the chair’s explanation in focus.

The Fed raised rates once in September after markets had priced in another increase for October. Market pricing for an October hike fell from above 70% to below 30% after late September and early October remarks from officials indicated they could wait longer.

High oil prices and demand for materials and electricity tied to AI infrastructure added to price pressures in September. The Nasdaq 100 has fallen more than 7% since reaching a record high on Oct. 6. The 10-year U.S. Treasury yield had previously stood above 5% for several consecutive weeks.

Stephen Stanley, chief economist at Santander U.S. Capital Markets, expects rates to remain unchanged this week but sees another increase as possible in December. The policy challenge is to explain why rates are holding steady while inflation remains high, without closing off the possibility of another hike this year.

Since taking office in May, the Fed chair has offered little forward guidance on the interest-rate path. The July news conference’s overly brief wording caused market volatility. Hawkish remarks in August, the September increase and signals of another hike later this year somewhat repaired the Fed’s communication.