Federal Reserve preview: A pause before a December hike

The Fed is likely to pause at the 28 October meeting but hike by 25bp in December because inflation remains above target and officials still see a need for further tightening.

• A September core CPI surprise of 0.3% month-on-month briefly pushed October hike expectations above 50%, but comments from Jefferson, Bowman and Waller, followed by Chair Warsh’s restrained IMF remarks, reduced that probability.
• The latest Summary of Economic Projections had four FOMC members projecting 50bp of additional hikes by year-end, while Hammack, Kashkari and Logan had already dissented in favour of a hike in July.
• ING expects a 25bp December hike to bring the Fed funds target range to 4-4.25%, followed by a prolonged pause through December 2027; its forecast differs from the Fed’s central projection of one hike this year and no changes throughout 2027.
• The forecast assumes lower energy and shipping costs after the midterm elections, wage growth of 3%, and further housing disinflation; these factors could bring US inflation back to 2% in the second half of 2027.
• The 10-year Treasury yield has fallen below 5% after previously exceeding 5.25%, but inflation, fiscal deficits and the AI boom could eventually push it back above 5%; the dollar should retain most of its September gains and EUR/USD could return near 1.11.

Takeaway: Investors should expect no October policy shock, a likely December hike and continued support for short-dated US yields and the dollar, while a prolonged conflict and higher energy costs could force additional hikes in the first quarter of 2027 before sharper cuts later in the year.