Fed poised to pause, inflation still firm

Federal Reserve officials are expected to leave the benchmark interest rate unchanged in a 3.75%-4.00% range at their October 27-28 policy meeting, after signalling they will not raise US short-term borrowing costs again this week. Rate futures priced a 90% chance of a hold as of Friday.

The anticipated pause comes even as inflation concerns remain prominent, leading many investors and economists to believe that any break in rate increases may be temporary. Policymakers are aiming to balance the need to contain price pressures against signs that tighter financial conditions are already restraining the economy.

Inflation picked up last month and broadened beyond rising fuel prices, and US economic growth is expected to have accelerated last quarter. Strong consumer spending and surging business investment tied to demand for artificial intelligence have powered these gains.

The labour market has remained stable alongside this momentum. The unemployment rate was 4.2% last month, and weekly unemployment insurance claims are running lower than at any point in Fed Chairman Kevin Warsh's lifetime. Hourly wage growth has tracked below inflation for the last six months, suggesting wage gains are not adding substantial additional pressure to prices.

Some analysts argue that recent figures on growth, consumer demand, the labour market and inflation would justify another rate increase. However, the sharp rise in US 10-year Treasury yields after the Fed’s September hike pushed borrowing costs toward near quarter-century highs, raising concern that financial conditions might slow the economy more than intended.

That surge in longer-term yields prompted several influential officials, including the New York Fed president and the Fed vice chair, to signal that the central bank is willing to wait for more data before deciding on further policy moves. Bond yields eased late last week amid a stock market selloff linked to worries about the sustainability of AI-related demand, adding another layer of complexity to the policy outlook.

Minutes from the Fed's September meeting indicated that many policymakers viewed that month’s rate hike as insurance against rising inflation risks that might begin to ease over time. Even so, some economists expect at least one dissent at the October meeting from more hawkish policymakers who may favour another increase.

One chief US economist now anticipates two additional rate hikes from the Fed to bring inflation back to its 2% target, defined by the 12‑month change in the personal consumption expenditures price index. Economists project that September’s PCE inflation reading, due Thursday, rose to 3.6% from 3.4% in August, reflecting higher gas prices associated with the Middle East conflict and broader pressures from categories such as airfares, rents and computers.

With inflation still above target and economic activity proving durable, the October pause is widely seen as a tactical step rather than a definitive end to tightening. The evolution of inflation, labour market conditions and financial markets in the coming months is set to determine whether the Fed resumes rate hikes or extends the hold.