- The US Federal Reserve is likely to keep interest rates steady at 3.75%-4.00% in October.
- Inflation pressures are broadening, with the PCE price index expected to rise to 3.6% year-on-year.
- US economic growth remains strong, driven by consumer spending and AI-related business investment.
The US Federal Reserve is expected to keep interest rates unchanged at its October 27-28 meeting, but the decision may offer little reassurance to investors hoping the central bank is nearing the end of its tightening cycle.
With inflation showing signs of broadening and economic activity remaining resilient, policymakers face a difficult balancing act: keeping borrowing costs steady for now while preserving the option of further rate hikes if price pressures persist.
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According to Reuters, financial markets were pricing in a 90% probability of the Fed holding rates in the 3.75%-4.00% range, as of Friday. However, the anticipated pause comes amid concerns that inflation could accelerate further, potentially forcing policymakers to revisit their stance in December.
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Here are three key indicators to watch.
1. Inflation: The Biggest Test For The Fed
Inflation remains the central bank's biggest concern. Economists expect the September personal consumption expenditures (PCE) price index, the Fed's preferred inflation gauge, to rise 3.6% year-on-year, compared with 3.4% in August.
While higher fuel prices linked to the Middle East conflict are expected to contribute, price pressures are also spreading to areas such as airfares, rents and computers.
The Fed targets inflation at 2%. A further increase in price pressures could strengthen the case for additional rate hikes, even if policymakers decide to hold rates steady this week.
2. Economic Growth And Consumer Spending
The US economy has continued to demonstrate resilience, supported by consumer spending and rising business investment, particularly in artificial intelligence-related infrastructure.
Government data due after the Fed's decision is expected to show that economic growth accelerated in the third quarter. Strong demand could make it harder for the central bank to justify easing its inflation-fighting stance.
BMO Chief US Economist Scott Anderson told Reuters that he expects two more rate hikes to contain inflation, adding that policymakers may have more work to do.
3. Labour Market And Financial Conditions
The labour market remains relatively stable, with unemployment at 4.2% in September and weekly jobless claims running at low levels. At the same time, wage growth has trailed inflation over the past six months, suggesting that labour costs may not be adding significantly to price pressures.
Financial conditions will also matter. Rising US Treasury yields have tightened borrowing conditions, potentially reducing the need for an immediate rate increase.
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What Comes Next?
Fed Chair Kevin Warsh's comments after the meeting will be closely watched for clues about December. Reuters reported that economists expect at least one dissent in favour of a rate hike, highlighting divisions among policymakers.
With inflation still above target and growth holding up, a pause may offer only temporary relief to borrowers and markets.
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