The Federal Reserve of the United States (Fed) is holding a new monetary policy meeting this Wednesday, and the market consensus points to the central bank keeping the official interest rate unchanged. After the increase in the reference rate agreed upon at the last meeting, the first in more than three years, experts anticipate that the next upward move will come before the end of the year.
Despite inflation continuing to exert pressure on the U.S. economy, as is the case in much of the rest of the world, the Fed would choose to take a breather before tightening financial conditions again. The goal is to give markets room to digest the previous increase in the cost of money and analyze its effects in more detail.
This meeting on October 28 comes just days before the midterm elections -- 'midterms' -- considered a key test for U.S. President Donald Trump. The president himself has pointed to these elections as a milestone from which he will make decisions regarding the war in Iran, without providing further information for now.
In this scenario, the majority of analysts believe that a new rate hike in the short term does not fit the context faced by the Federal Open Market Committee (FOMC).
"No changes are expected in the Federal Reserve's intervention rate at this week's meeting. The market assumes that the U.S. monetary authority will choose not to modify its monetary policy and will keep rates in the range of 3.75% and 4% that it established after last month's increase. The proximity of the midterm elections and the need to assess the impact that this increase has had on the market would be some of the most relevant arguments when postponing the decision to raise rates again in October," highlighted Cristina Gavín Moreno, head of Fixed Income at Ibercaja Gestión.
In September, inflation in the United States stood at 3.7%, above the 3.4% of the previous month, driven by the rise in gasoline and other energy prices. Meanwhile, the West Texas Intermediate (WTI) crude oil barrel reached highs last week not seen since May, hovering around 100 dollars. Regarding employment, job creation moderated in September, with 29,000 new jobs, compared to the 133,000 recorded in August.
"The data published since the last meeting supports the idea that the labor market is in good shape and that inflation remains too high to be comfortable. At the same time, (Kevin) Warsh has shown support for focusing on trends. One more month of data barely helps to determine if the trend is changing," explained Kish Pathak, fixed income research analyst at MFS, and Erik Weisman, chief economist and portfolio manager.
The latest public interventions from various Fed officials also point to a continuity decision. The president himself, Kevin Warsh, stated from Bangkok, where the International Monetary Fund (IMF) was holding its annual assembly, that in the last month "everything has aligned with our expectations," a message much less aggressive than the one delivered in Jackson Hole before the September adjustment.
In the same vein, the vice presidents of the Federal Reserve, Philip Jefferson and Michelle Bowman, and Governor Chris Waller have insisted in recent weeks that the central bank does not see it as urgent to resume rate hikes, cooling the possibility of a move in October, although not closing the door to further tightening later on.
"If economic data continues to be as expected, I foresee new rate increases to drive a more timely return of inflation to our 2% target. However, there is some flexibility regarding when these increases will occur. They do not need to happen at consecutive meetings," Waller stated earlier this month at an event held alongside the Central Bank of Turkey in Istanbul.
On the central bank's agenda are also other sources of uncertainty for the U.S. economy, such as the evolution of the AI sector, which has been subject to strong stock market volatility in recent weeks, and the rise in yields of U.S. sovereign debt and other developed countries, factors that reinforce the option to maintain the current level of rates.
"The strong impact that the French bond market has suffered constitutes another important factor, as it intensifies the widespread concern in the sector. Furthermore, it may contribute to systemic pressure. This is not the conducive environment for the Federal Reserve to increase concern by tightening its monetary policy. It is the ideal meeting to keep rates unchanged," explained ING Think analysts James Knightley, Padhraic Garvey, and Chris Turner.
Rate hike in December in the spotlight
The forecast that there will be no changes in October does not imply that the monetary tightening cycle has concluded. The scenario that the markets are managing is that of a temporary pause before a 25 basis point hike at the FOMC meeting in December, a move that investors practically take for granted.
"Ebury expects that the Fed will keep interest rates unchanged at its meeting this Wednesday and will postpone a new hike until December. Despite the rise in inflation in September, Ebury analysts believe that the moderation of wages, the weakness of employment, and the increase in financing costs resulting from the rise in Treasury bond yields advise acting with caution. Markets assign barely a 10% probability to a hike this week, compared to the 90% they attribute to December," stated analysts from the 'fintech'.
From now until December, Fed officials will have new references on inflation, the labor market, and growth that will allow them to refine their diagnosis of the U.S. economy. Nevertheless, projections indicate that price pressures will remain present, while employment would remain solid.
"Although the inflation data for September that we have seen in the U.S. was worse than expected both in its general and core components, it still seems early to confirm such an upward trend and investors believe that Warsh will choose to delay the hike until December, where the market anticipates a new increase in the intervention rate that will place the range between 4% and 4.75%," indicated the analyst from Ibercaja.
In this context, the decisions made after the midterm elections, especially regarding the war in Iran, will be decisive for the direction that interest rates take, in an environment marked by geopolitical tensions and rising energy costs.