October hold lifts odds of December Federal Reserve hike - TD Securities

4.00% is TD Securities strategists’ forecast for the Fed Funds rate at the October FOMC meeting. They expect the Federal Reserve (Fed) to hold despite elevated inflation and resilient labour market data. In their view, a pause would make rate hikes in December and March more likely. They caution that a single adverse inflation reading could bring tightening forward and potentially increase its scale.

October Hold Raises 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.)