At its October meeting, the Federal Open Market Committee (FOMC) kept its target range for the federal funds rate unchanged at 3.75%-4.00%, as expected.
Federal Reserve Chair Kevin Warsh noted that there has been some progress on inflation, but there remains work to do. While this suggests that additional tightening is likely, ongoing geopolitical uncertainty and cyclical vulnerabilities justify a risk-aware approach to policy implementation. This points to a gradual tightening pace—our base case calls for the next 25 bps rate hike in December, with another in early 2027.
Chair Warsh gave an upbeat assessment of the economic backdrop, offering a slight upgrade to his remarks from the September meeting. He described the economy as pointing in the right direction, noting that the primarily technology-led investment wave is beginning to broaden out to other categories. This has kept labor market conditions positive, with the unemployment rate lower than a year ago and initial jobless claims close to the lowest level in generations.
On the other hand, the inflation side of the Fed’s dual mandate remains problematic, with energy prices having risen in recent weeks and remaining elevated. However, there appears to be little sign that price pressures are broadening and, importantly, measures of inflation expectations have remained anchored.
These conditions have left the Fed with ample room to take stock of how quickly the removal of policy accommodation is working through the economy. Given the many uncertainties facing the outlook, the Fed’s preference is to carefully and patiently assess the transmission of policy.
Policy outlook
The economy appears to be strengthening, labor market conditions are steady, and inflation expectations remain anchored. As a result, the Fed has time on its side, providing policymakers room to wait for more data. AI-related investment may be booming, but the broader economy is not firing on all cylinders, and elevated geopolitical uncertainty argues for a cautious approach to policy.
That said, with inflation still above target, the direction of travel for policy remains clear. The Fed is taking back some of last year’s rate cuts, and today’s two dissents reinforce that tightening bias. We expect a hike in December and another in early 2027.
Investing involves risk, including possible loss of principal. Past performance is no guarantee of future results.
Views and opinions expressed are accurate as of the date of this communication and are subject to change without notice. This material may contain ‘forward-looking’ information that is not purely historical in nature and may include, among other things, projections and forecasts. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this material is at the sole discretion of the reader.
The information in the article should not be construed as investment advice or a recommendation for the purchase or sale of any security. The general information it contains does not take account of any investor’s investment objectives, particular needs, or financial situation.
6068293