Fed set to hold rates at 3.75%-4% as markets price in a December hike
The US Federal Reserve is widely expected to keep its benchmark rate at 3.75% to 4% when it announces its decision on Wednesday, less than a week before the US midterm elections, Euronews reported. CME Group’s FedWatch tool puts the chance of a hold above 90%. It puts the chance of a quarter-point hike at the 8-9 December meeting at 73%.
“The Fed looks set to sit on its hands this week, but it’s likely to come with a hawkish tone, with markets pricing in close to an 80% chance of another hike in December,” said Josh Gilbert, Lead Analyst APAC and Middle East at eToro. “Unless Chair Kevin Warsh pushes back hard, investors should treat a hike before year-end as the base case.”
All 100 economists polled by Reuters between 16 and 20 October expect a December hike, and 94 of them expect the Fed to pause this month, according to a Kalshi summary of the survey. In a preview note, ING forecast a 25 basis point rise in December, which would take the target range to 4%-4.25%, followed by a long pause through to December 2027. The bank noted that the Fed’s own central projection calls for one hike this year and no change in rates through 2027.
Energy costs keep inflation hot
US consumer prices rose 3.7% in September from a year earlier, up from 3.4% in August, according to Bureau of Labor Statistics data reported by CBS News. Core CPI, which excludes food and energy, rose to 2.6% from 2.4%, ahead of the 2.5% economists had expected. The Labor Department said gasoline prices climbed 9.1% in the month and accounted for more than half of the monthly increase. David Royal, chief finance and investment officer at Thrivent, told CBS News the current rate-hiking cycle “isn’t likely to end anytime soon”.
“Inflation is still running at 3.7%, and with oil keeping business costs high, we’re unlikely to hear Warsh sound relaxed about it,” Gilbert said. According to Euronews, Brent crude fell more than 6% on Monday from about $117.4 a barrel as diplomacy over the Iran war appeared to gather pace. It still traded near $110.8 on Tuesday, well above the $72 it fetched before the war began in late February. The outlet also reported that diesel hit a record $6.53 a gallon in late September, lifting the cost of shipping almost everything. Economists cited by CNBC also point to tariffs, AI data centre construction and strong consumer demand in categories such as travel as sources of upward pressure on prices.
Weak hiring buys policymakers time
“September’s jobs report gave the Fed some breathing room, with just 29,000 jobs added and wage growth slowing,” Gilbert said. Economists had expected about 90,000 new jobs and an unemployment rate holding at 4.1%, CNN reported. Instead, unemployment rose to 4.2%, and annual wage growth slowed for a fourth straight month to 3%, its lowest since May 2021. Bureau of Labor Statistics revisions cut a combined 60,000 jobs from July and August, turning July into a loss of 10,000.
Jerry Tempelman, vice president of economic and fixed income research at Mutual of America, told CBS News that the weak print raised questions about how durable the labour market is after the Fed’s first rate increase since 2023. JPMorgan chief US economist Michael Feroli wrote that officials “aren’t yet convinced that the Fed needs to embark on a full-throated tightening cycle”, Morningstar reported. In speeches reported by Euronews, New York Fed President John Williams said there was no urgency to move again, and Vice Chair Philip Jefferson said policymakers may need more time to reach a judgement. The wider economy is still growing. GDP expanded at an annualised 2.2% in the second quarter, and the Atlanta Fed’s GDPNow tracker points to 3.5% for the third.
Warsh’s silence on guidance is the risk
“We’re not in that business anymore,” Warsh said at the IMF and World Bank annual meetings in Bangkok this month, explaining that he would not signal what the Fed might do at upcoming meetings. His approach has already caused friction. Bloomberg reported that his sparing language after the July rate hold unsettled markets that wanted assurance the Fed would act if price pressures worsened. He followed with a tougher August speech, and in September the Fed raised rates and projected one more hike before year-end.
“I do think that they’ll hike again in December,” Stephen Stanley, chief economist at Santander US Capital Markets, told Bloomberg. He added that Warsh’s challenge will be to explain why the Fed held off this month while keeping December open. According to Euronews, Cleveland Fed President Beth Hammack and Dallas Fed President Lorie Logan have both said rates are not yet high enough to cool inflation and could vote for a hike. As many as three officials could dissent. Aditya Bhave, head of US economics at Bank of America, is forecasting a surprise hike this week, telling Bloomberg that inflation has worsened on net since September.
Joseph LaVorgna, chief economist at SMBC’s US arm and a former Trump administration official, told Euronews the Fed would not want to “poke the White House in the eye” days before the vote. Bloomberg reported that President Donald Trump sharply criticised the September rate increase, though he blamed it on Warsh’s colleagues.
Higher yields raise the cost of the AI build-out
“Markets will be most focused on how far this tightening cycle runs into next year, with futures already pricing more than two further hikes by the end of 2027,” Gilbert said. “If the Fed signals more than that, it could push bond yields higher again, making future company profits worth less today and putting pressure on share valuations.”
The 10-year US Treasury yield rose to 5.36% in early October, its highest intraday level since 2002, before easing to around 5%, Goodreturns reported. “That matters even more for the cloud giants, who are increasingly borrowing to pay for their data centre build-out, with Amazon alone selling $25 billion of bonds in July, so higher rates mean that spending costs more to fund,” Gilbert added. CNBC reported that Amazon’s eight-part bond sale was its latest debt raise to fund its AI build-out. The company expects capital expenditure of about $200 billion in 2026, up from $131 billion last year, with most of it going to data centres, custom chips and other AI equipment.
Chipmakers have already felt the pressure. CNN reported that a global sell-off in semiconductor stocks followed the hotter-than-expected US inflation report, which revived concerns that rising rates will make AI investment more expensive to fund. Bloomberg reported that the Philadelphia semiconductor index lost $1.6 trillion in market value in six sessions. According to Yahoo Finance, the index fell for eight straight sessions to 16 October, its longest losing run since 2008. The iShares Semiconductor ETF, which tracks a similar index, is still up about 64% for 2026, suggesting investors are repricing the AI spending cycle rather than abandoning it. “A hold on its own is unlikely to give markets much relief,” Gilbert said.
Dollar pegs carry the decision to the Gulf
“For investors in the Gulf, the Fed’s decision matters closer to home too, as central banks with currencies pegged to the dollar typically follow its lead, so a December hike would likely flow through to local borrowing costs,” Gilbert said. Gulf News reported that the UAE Central Bank raised its base rate by 25 basis points to 3.9% from 17 September, a day after the Fed’s hike. Saudi Arabia’s central bank lifted its repo rate to 4.5%, and Oman, Qatar and Bahrain made matching moves, Arab News reported. Kuwait, whose dinar is pegged to a basket of currencies, left its rates unchanged. One-month EIBOR stood at 3.99% and three-month EIBOR at 4.13% as of 16 September, according to figures published by property platform Prypco.
US households are also paying more to borrow. According to Euronews, the average 30-year US mortgage rate reached a three-year high of 7.4% in early October before easing to 7.32%. Oxford Economics estimates this year’s rise has priced 5 million more American households out of buying a home. Expectations of further hikes have kept the dollar close to an 18-month high.
Markets will get the first estimate of third-quarter GDP and September data for the Fed’s preferred inflation gauge, the PCE price index, on Thursday. “After a rough month for chip stocks, a hawkish Fed would add to the pressure on riskier assets, and Warsh’s tone will likely set the mood for markets right through to year-end,” Gilbert said.
