Another December Fed Hike? The Odds Are Rising

In A Nutshell: Rates have fallen about 30–40 basis points since the peak at the end of September and there’s little reason to believe the volatility will slow down.

Last Week’s Highlights

The Fed meeting last Wednesday was the highlight of the week, with the committee voting to hold rates steady as expected. There were two dissents, with one coming from a surprising source, Governor Lisa Cook, who is usually seen as someone who favors lower rates. The statement and press conference reiterated a desire to keep hiking, making a December hike more likely than not if the economic data comes in as expected.

The Fed has been highlighting elevated inflation and strong economic growth as its reason for hiking. And Q3 GDP, in fact, came in at a brisk 3.4% annual rate. Real business fixed investment spending grew at a 12.7% annual rate thanks to rapid growth in AI spending. And real consumption grew at a 3.8% annual rate as people spent out of savings and wealth increases rather than income growth. The question now is what happens to growth in Q4. Real-time data is pointing to a potential slowdown as consumers pull back.

Upcoming Attractions

It’s another big week with both the midterm election tomorrow and employment data arriving throughout the week. Democrats are expected to comfortably gain a majority in the House of Representatives with control of the Senate also favoring Democrats, but less certain. Expectations for government spending, which has been a factor for rates, could certainly change with a more divided government. But the near term economic impact might be felt most acutely as we near government funding and debt limit deadlines. The closest budget deadline is December 11, which might get pushed to Q1. And we’re likely to hit the debt limit again in Q1 at which point the Treasury will take “extraordinary measures” until we truly run out of options sometime before October 2027.

Since it’s the first week of the month, we’ll also get the typical employment reports, including job openings and turnover on Tuesday and the official jobs report on Friday. With the Fed squarely focused on inflation, the jobs report mostly serves as a check on whether the Fed needs to turn its attention back to recession risk, which would reduce the need for the rate hikes that markets have priced in. So far this year, the answer has been “no,” with the labor market on solid enough footing and that is not expected to change with this week’s data.

Finally, Fed officials are out of their blackout period following last week’s FOMC meeting. With Chairman Warsh typically reluctant to offer much forward guidance, markets have been relying more on surrogates to forecast the outcome of the next meeting. There are numerous speaking engagements on the calendar, including Cleveland Fed President Hammack and Dallas Fed President Logan on Thursday, and New York Fed President Williams on Friday. Forecasters will be looking for clues to support the “hike every other meeting” thesis.

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