FOMC preview: Election deflection, dissent a key, what investors should do
While analysts offer many reasons why the Federal Open Market Committee this week will hold the fed funds target in range between 3.75% to 4%, although they see the next move as a hike, possibly as early as December, they are watching the meeting closely for signs of what may come and whether the panel’s unanimity begins to crack.
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“I expect the Fed to hold rates steady,” said Karen Manna, fixed income strategist at Federated Hermes, “but the vote may prove more revealing than the decision itself. Inflation remains stubborn enough to keep further tightening on the table, even as policymakers appear reluctant to react to every upside surprise. The bigger question is whether the consensus seen at recent meetings begins to fracture. Several Reserve Bank presidents remain concerned about inflation risks, and I would not be surprised to see as many as three dissents favoring a hike. That would underscore the growing tension within the Fed over whether policy is restrictive enough to bring inflation back to target.”
With the pause widely expected, bond market participants “will be focused less on the decision and more on what Chair [Kevin] Warsh signals about the path ahead,” Manna said. “The bond market will be watching for any shift in the Fed’s inflation outlook, signs of growing disagreement among policymakers, and whether December remains firmly in play.”
Also drawing interest will be the panel’s assessment of “energy-driven price pressures and whether AI-related productivity gains could influence the growth and inflation outlook,” she said.
Another possible revelation could be anything Warsh says about the task forces he created. “Even limited detail could shed light on how the Fed’s policy framework and communication strategy may evolve,” Manna said.
Since Warsh eschews forward guidance — even refusing to submit dots for the Summary of Economic Projections — “the Fed’s tone may carry more weight than its decision,” she added. “The approaching election season only raises the stakes for clear, consistent communication.”
Manna’s takeaway for investors? “Remain nimble and place a premium on liquidity.”
With the recent volatility, “the front end of the yield curve continues to offer compelling value, providing attractive income while limiting exposure to changes in policy outlook,” Manna said. “Investors appear reluctant to make bigger directional bets ahead of the FOMC meeting and the election. As those uncertainties recede, opportunities across fixed income sectors should become much clearer.”
The meeting should be “straightforward and uneventful,” according to
“The Fed historically has avoided raising interest rates right before an election,” he noted, although high inflation forced the panel to move on Nov. 2, 2022, the first time it took action right before an election since 1978.
The minutes from the September FOMC “were more hawkish than expected,” Skancke said, pushing up financial markets’ expectations for future rate hikes. “So bond and stock markets should react positively to the Fed’s announcement of no change in rates.”
Inflation will remain high, with the Fed’s preferred inflation metric (core personal consumption expenditures deflator) released later in the week, expected to show a further increase in inflation, he said.
“We expect a hawkish hold,” said Subadra Rajappa, head of research at Societe Generale, with a commitment to reaching the 2% inflation target. “With the recent rally, the market is now pricing in a more modest 64 basis points of hikes over the next year.”
The meeting and the midterm elections will lead “bonds to retain a bullish bias,” she said.
“But post-election uncertainty around inflation, the magnitude of hikes, Al capex spending, and the trajectory for debt and deficits could reinforce investor concerns and dampen the potential for a meaningful rally in bonds unless economic fundamentals deteriorate,” Rajappa said.
“Although there are good arguments for the Fed to justify another 0.25% hike in October, we expect a pause,” said
“The pause allows for economic and inflation data, and more time for the potential for easing geopolitical tensions in the Middle East and Russia/Ukraine,” he said. “But since the mid-September meeting inflation pressures have increased and U.S. economic (GDP) growth appears sustainable above 2.0%. This could push a few FOMC voters to argue for an additional hike in October as additional insurance against potential persistent inflation. The vote to hike rates in September was unanimous 12-0, and we believe some of those voters will push for another hike, so we do not expect a unanimous vote to hold rates unchanged.”
Should the panel pause, he said, “we expect Chair Kevin Warsh to remain hawkish, as his comments in September were that the September 0.25% rate hike only ‘removed a dose of accommodation,’ indicating that Warsh does not view current fed funds target rate levels as restrictive.”
Still Ragan offered reasons why a pause makes sense. “The beginning of a potential sustained period of monetary hiking is not taken lightly and a more measured pace of implementing restrictive policy gives time for geopolitical inflation pressures to resolve.”
Also, he pointed to the midterm, noting, “the Fed may want to avoid political reactions to a rate hike.”
Ragan looked at Treasury yields since the end of August, with the 2-year yield rising 58 basis points and the 10-year up 56 bps in the next four weeks, before dropping in October, indicating that markets are looking at things differently,” supporting a pause.
“We expect the Fed to address the recent rate volatility at the post-meeting press conference,” he said.
FHN Financial Chief Economist Chris Low sees the FOMC signaling “more tightening to come” despite holding rates at this meeting. “Most of the FOMC has signaled a desire to hike one more time in the fourth quarter, but waiting until December and moving at every other meeting gives the Fed time to see the effect of tightening and — because the Fed is hiking from a rate that is not very accommodative — is still consistent with St. Louis Fed President Alberto Musalem’s idea that tightening should be done in six to nine months.”
Additionally, he said, “although the Fed claims to be apolitical, raising rates six days before a politically charged election would invite controversy. It is best for the Fed to stand aside.”
Still, “financial conditions have tightened since the last Fed meeting,” Kalish said.
“The bond market’s failure to push Treasury yields to new highs following the hotter than expected inflation reports two weeks ago may show that the bond market is looking forward rather than backward,” he said. “Traders seem more worried about growth than sticky inflation.”
But Kalish said he wouldn’t be surprised by as many as three dissents.
James McCann, senior economist with Edward Jones, said, “Warsh is likely to reiterate his tough line on bringing inflation to target but could hint at a degree of patience around this process, consistent with the message from a range of Fed speakers in recent weeks.”
The Fed showing patience, he said, “could provide markets with reassurance that the central bank is carefully balancing the risk of raising rates enough to help bring inflation back toward target, but not too much to derail economic growth. We expect a rate hike in December and potentially one more move in 2027.”
