Most Economic Actors Expect the Fed to Keep Rates Unchanged But Hike in December: Poll

Most economic actors expect the Federal Reserve to leave interest rates unchanged after Wednesday's meeting but hike in the following one in December, a new poll shows.

Concretely, 93% of respondents said they expect no hikes after Wednesday's meeting, while 76% believe the central bank will increase them in the next meeting. The poll surveys 30 fund managers, strategists and economists. Over half of them believe there will be an average of two rate hikes next year as well as inflation continues to run above target.

Elsewhere, 70% of respondents said the inflation problem now goes beyond energy prices, which have surged as a result of the Iran war and the blockade of the Hormuz Strait.

The expected pause, however, comes ahead of government reports that could strengthen the argument for further tightening. Data scheduled for Thursday are projected to show faster inflation in September and stronger economic growth in the third quarter, supported by consumer spending and business investment tied to artificial intelligence.

Economists expect the annual increase in the personal consumption expenditures price index, the Fed's preferred inflation measure, to reach 3.6%, up from 3.4% in August. Higher gasoline prices linked to the conflicts in the Middle East account for part of that acceleration, but price pressures have also spread to airfares, rents and computers.

That broader increase complicates the Fed's effort to bring inflation back to its 2% target. However, September's unemployment rate stood at 4.2%, while weekly applications for unemployment benefits remained exceptionally low.

The main reason to wait lies in the bond market. After September's rate hike, the yield on the 10-year Treasury climbed toward its highest levels in nearly 25 years, threatening to restrain activity more sharply than officials intended.

Higher Treasury yields can raise financing costs for households and businesses, effectively doing some of the Fed's work. New York Fed President John Williams and Fed Vice Chair Philip Jefferson subsequently indicated that policymakers could wait for additional evidence before deciding their next move.

But that rationale became less straightforward late last week, when bond yields retreated during a stock selloff driven by concerns about the sustainability of AI demand. An easing in financial conditions could weaken the case for an extended pause.

Fed Chair Kevin Warsh also faces a sensitive communications test days before the November 3 midterm elections. Voters' concerns about affordability encompass both persistent inflation and the higher interest rates intended to contain it.