The Federal Reserve is widely expected to leave interest rates unchanged next week, but the decision may offer little clarity on what comes next.
With inflation running above target, oil prices elevated and hiring showing signs of weakness, policymakers face competing reasons to tighten further or wait.
Futures-based estimates of CME FedWatch probabilities put the chance of a hold at 88%, against 12% for a quarter-point increase.
The Fed’s October 27-28 meeting follows its September rate increase, which came amid renewed inflation pressures.
A UBS note published October 19 also identified an unchanged October rate as its base case, followed by measured further tightening.
The firm said markets were pricing a more aggressive tightening path than it expected.
But the central question is not simply whether the Fed will hold next week.
Investors will be looking to Chair Kevin Warsh for clues about conditions that could prompt another increase in December, and whether the central bank is giving enough weight to employment risks.
Warsh’s communication strategy leaves markets guessing
Warsh has made clear that he does not intend to provide the kind of forward guidance used by previous Fed chairs.
Speaking in Bangkok on October 16, he said: “I don’t prejudge meetings. I don’t believe in saying now what I might do at the meetings that we have in the balance of this year.”
That approach is likely to make the statement, voting record, and press conference particularly important.
The October meeting will not include a new Summary of Economic Projections, which is published at selected meetings, leaving investors without an updated set of interest-rate projections.
Tracy Shuchart, Senior Economist at NinjaTrader, expects limited guidance from Warsh.
“He has been consistent since he took the chair that the Fed is out of the forward guidance business, he doesn’t prejudge meetings, and he still won’t submit a dot,” the economist told Invezz.
“Expect the same on the 28th. Anyone waiting for him to tee up December is going to be disappointed.”
Patrick Boyle, a visiting professor of finance and former hedge fund manager, said the wording of the statement could take on greater significance in the absence of forward guidance.
He suggested investors watch how the Fed characterizes the labour market.
A shift in its language from describing conditions as “solid” to saying they have “softened” could indicate that policymakers view the weak September employment report as more than temporary noise.
The voting record could also provide clues. Boyle noted that September’s decision was unanimous and said a dissent in either direction would offer insight into the committee’s debate over December.
JoAnne Bianco, Senior Investment Strategist at BondBloxx, similarly said markets should focus less on the immediate decision and more on whether the Fed leaves the door open to additional tightening.
“The more important question is whether Chair Kevin Warsh characterizes inflation as a temporary setback or evidence that policy needs to become more restrictive,” she told Invezz.
Oil prices raise questions about the source of inflation
The expected decision to hold rates comes against a difficult inflation backdrop.
US consumer prices rose 0.6% in September from a month earlier, lifting the annual headline inflation rate to 3.7% from 3.4%.
Core CPI, which excludes food and energy, rose 0.3% monthly and 2.6% annually, up from 2.4% in August.
Bureau of Labor Statistics data also showed that gasoline prices rose 9.1% in September.
Producer prices added to the concerns. The UBS note said September’s 1.3% monthly increase was the largest in four and a half years, exceeding the 0.5% consensus forecast.
Although energy accounted for much of the increase, UBS noted that prices rose across a broader range of goods and services.
Brent crude was trading near $113 a barrel on Friday, October 23, after a surge linked to renewed concerns about Middle East supply disruptions.
The challenge for the Fed is that higher interest rates cannot directly resolve a disruption to oil supplies.
Raising borrowing costs may instead weaken demand and economic activity, even as households and businesses face higher energy bills.
Shuchart said the Fed has repeatedly treated oil price shocks as transitory and indicated that monetary policy should look through them.
But she argued that September’s inflation report made that approach harder to sustain.
“The problem is the September CPI didn’t look transitory,” she said, pointing to the rise in core inflation and the possibility that energy costs were feeding into transportation services, airfares, freight and goods prices.
“The Fed is tightening into a supply shock with a hiring stall underneath it,” Shuchart said.
Rebecca Homkes, an Economist and Lecturer at London Business School, also highlighted the difficulty of using interest rates to address an energy shock.
“Interest rates are a crude tool for a complicated world, and an incredibly blunt one against the supply shocks driving price levels up,” she said.
But Homkes argued that the policy context makes it harder for the Fed to assume that an oil-related increase in prices will be temporary.
She referred to the Trump administration’s policy environment, saying that rather than simply looking through an energy shock, policymakers may have to anticipate further disruptions.
“With the Trump administration, it’s more ‘look for it:’ another shock will come soon,” Homkes told Invezz.
Robert R. Johnson, Professor of Finance, Heider College of Business, Creighton University, made a related but distinct argument.
He said that describing the inflation problem as an oil-driven shock assumes the pressure is transitory, while the war with Iran and the Trump administration’s tariff policy could continue contributing to higher prices.
Johnson told Invezz that both the tariff policy and the war were “unforced errors” by the administration, arguing that neither appeared close to resolution.
His comments challenge the idea that policymakers can treat the current inflation pressure as a single, temporary supply disruption.
In his view, the sources of price pressure extend beyond oil itself.
The implications for monetary policy remain uncertain. Homkes said higher rates can worsen a slowdown if supply shocks push firms to reduce hiring or investment.
At the same time, she said September’s inflation reading, economic growth and the latest personal consumption expenditures inflation data suggested that policy was not yet too restrictive.
A weak labour market complicates the case for further tightening
The inflation problem is only one side of the Fed’s dilemma.
The other is the labour market, where the latest report showed payroll growth falling short of expectations.
US employers added 29,000 jobs in September, compared with expectations of 90,000, while the unemployment rate stood at 4.2%.
Revisions to the July and August payroll figures reduced employment growth across those two months by a combined 60,000.
The BLS employment report showed that employment changed little across major industries.
Boyle argued that the employment data deserve more weight in the Fed’s calculations.
Shuchart argued that the employment side is deteriorating faster than the inflation debate gives it credit for, pointing to weak payroll growth, downward revisions, an unemployment rate of 4.2% and negative real wages.
“That is not a labor market that absorbs a second hike quietly,” Shuchart told Invezz.
He said the September payroll report and downward revisions could indicate a turning point rather than a temporary loss of momentum.
He also argued that the September jobs report came after the previous set of Fed projections, which had pointed to another rate increase in December.
The next projections, due in December, will give investors a chance to see how policymakers have adjusted their outlook following the weaker employment figures.
Bianco offered a more measured assessment. She said the labour market was cooling through reduced hiring rather than a meaningful increase in layoffs, describing the pattern as normalization rather than contraction.
“We do not think policymakers will place excessive weight on one weaker payroll report,” she said, adding that payroll data can be volatile from month to month.
Bianco said the Fed would likely need to see several consecutive months of weak payroll growth, a sustained increase in unemployment, slowing wage growth and broader weakness in hiring intentions before becoming more concerned.
That distinction matters for the December decision. A labour market that is gradually losing momentum may allow the Fed to wait for more evidence.
A sharper deterioration, however, could make another rate increase harder to justify even if inflation remains above target.
Johnson said the Fed’s dual mandate means policymakers must balance stable prices against full employment.
“The Fed has a dual mandate of stable prices and full employment, and it shifts its focus when one becomes more problematic than the other,” Johnson said.
He argued that inflation is currently the more pressing concern, while also noting that tighter monetary policy could weigh on hiring.
He added that the Trump administration’s immigration crackdown was shrinking the labour pool, offsetting some of the effects of weaker employment demand.
The competing assessments leave the Fed with little room for a simple response.
The latest inflation data support the case for tighter policy, while the employment report raises questions about how much additional pressure the economy can absorb.
December remains the central question
Markets continue to price in another rate increase by the end of the year, but the experts differ on how firmly that outcome should be expected.
Shuchart said the market has priced the December hike at close to 90%, but urged investors to “fade the certainty, not the direction.”
Her base case is a pause in October followed by another increase in December, although she cautioned that employment weakness could complicate that path.
Boyle also described a hawkish hold in October as his base case but said December remained genuinely open.
He said another increase would become more likely if core inflation continued to rise at a monthly pace of 0.3%, inflation expectations increased, and oil prices remained elevated.
A further weak payroll report, a rise in unemployment towards 4.4%-4.5%, or a resolution to the conflict that pulled oil prices back towards $80 a barrel would strengthen the case for a hold, he said.
Bianco said BondBloxx expects a December increase if inflation remains stubbornly above target, core inflation accelerates and the labour market remains firm.
Softer growth, moderating wage pressures or evidence that inflation expectations remain anchored would strengthen the case for no further move.
Homkes likewise said an additional increase should be expected if inflation stays hot, while emphasizing that the Fed must also consider whether policy is becoming too restrictive.
The data released between the October and December meetings will therefore be important.
Boyle identified the October and November employment reports and the October CPI release, scheduled for November 10, as key indicators.
The December meeting will also include an updated Summary of Economic Projections, giving markets a fresh view of policymakers’ rate expectations.
For now, the October hold is the clear market base case. What remains unresolved is whether Warsh will use the meeting to emphasize the need to contain persistent inflation or leave room to respond to a weakening labour market.
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