Fed Watch: Holding The Line

The Federal Open Market Committee (FOMC) decided to keep rates unchanged, maintaining the fed funds trading range at 3.75% to 4.00%. After some early back and forth on the chances for a rate hike at this gathering, this result was largely expected. In fact, fed funds futures were pricing in more than a 90% chance that the fed funds target would remain unchanged. Now the focus has quickly shifted to the December FOMC meeting, where, data permitting, Warsh & Co. could implement another rate increase.

Interestingly, Chairman Warsh is still adhering to his “no forward guidance” mantra. However, that doesn’t mean there is no forward guidance, as Fed governors and regional bank presidents are still expressing their views. A relatively recent development, though, has been the public appearances of Vice Chair Jefferson and New York Fed President Williams. For those not familiar with Fed-speak, the chair, vice chair and New York Fed president have historically made up the Fed’s “Big Three,” the policymakers who typically speak on behalf of the U.S. central bank rather than simply expressing their personal opinions. In recent remarks, one got the sense that there was no urgency to raise rates, with Williams stating that he sees one more rate increase this year and no need for a hike in 2027.

In our opinion, the Fed believes it can afford a more deliberate, wait-and-see approach to monetary policy. In other words, let the data, especially on inflation, come to them. Against this backdrop, both the September Consumer Price Index (CPI) and Producer Price Index (PPI) reports didn’t do the policymakers any favors. To be sure, each of these inflation gauges came in somewhat hotter than expected, but given where the bar was for an October rate hike, the threshold was not met.

That doesn’t mean the policymakers aren’t focused on inflation. They are. In fact, one can argue that, in terms of the Fed’s dual mandate of employment and inflation, the latter is definitely job No. 1, an emphasis that even Chairman Warsh tends to acknowledge in public appearances with his commitment to “deliver price stability.”

As far as the U.S. Treasury (UST) market is concerned, further rate hikes following this pause are still anticipated. While UST yields fell noticeably over the last week or so, this rally was due to a safe-haven bid from the AI and technology-related equity sell-off, which was exacerbated by short covering. The forces that drove longer-dated Treasury yields higher in the first place have not gone away.

The Bottom Line

Now the question becomes: What next? If upcoming data continues to show solid growth and above-target, sticky inflation, we don’t necessarily see the beginning of a new tightening cycle, but rather just the removal of some of the rate cuts that occurred during the September–December period of last year. For the record, there were three rate cuts in the fall of 2025, and the Fed already reversed one of them. If our assessment comes to fruition, the FOMC could implement one or two more rate hikes in this cycle, with a December increase actively “in play.”