Federal Reserve: December hike odds rise after October hold - TD Securities

The likelihood of rate hikes in December and March would rise if the Federal Reserve (Fed) pauses in October, according to TD Securities strategists. Despite elevated inflation and robust labour market data, they expect the Fed Funds rate to remain at 4.00% at the October FOMC meeting. They caution, however, that a single poor inflation reading could prompt earlier and potentially more substantial tightening.

Could an October pause raise December rate hike risk?

"The FOMC is likely to remain on hold in October, raising the likelihood of a December hike while increasing the risk that officials fall behind the curve. Warsh is unlikely to offer forward guidance, but a hawkish inflation message could ease credibility concerns and encourage markets to price further tightening."

"Under a context of a labor market that remains in good shape, such an inflation backdrop would advocate for a continuation of the tightening cycle at the October meeting. Indeed, that was our initial expectation."

"As a result, we expect the FOMC to keep rates steady next week, and to resume tightening in December and March next year."

"Barring an unexpected shock, the December rate hike is all but locked in. In other words, pausing next week will set the bar high for avoiding an additional rate increase this year."

"But the opposite is also true: the bar is low for the market to feel that the Fed is falling behind the curve. It only takes one notably bad inflation report and/or a collection of strong labor market data for the market to start pricing larger odds of a 50bp rate increase in upcoming meetings."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)