FOMC holds rates with more work to do on inflation

At its October meeting, the Federal Open Market Committee (FOMC) kept its target range for the federal funds rate unchanged at 3.75%-4.00%, as expected.

Federal Reserve Chair Kevin Warsh noted that there has been some progress on inflation, but there remains work to do. While this suggests that additional tightening is likely, ongoing geopolitical uncertainty and cyclical vulnerabilities justify a risk-aware approach to policy implementation. This points to a gradual tightening pace—our base case calls for the next 25 bps rate hike in December, with another in early 2027.

The current assessment

Chair Warsh gave an upbeat assessment of the economic backdrop, offering a slight upgrade to his remarks from the September meeting. He described the economy as pointing in the right direction, noting that the primarily technology-led investment wave is beginning to broaden out to other categories. This has kept labor market conditions positive, with the unemployment rate lower than a year ago and initial jobless claims close to the lowest level in generations.

On the other hand, the inflation side of the Fed’s dual mandate remains problematic, with energy prices having risen in recent weeks and remaining elevated. However, there appears to be little sign that price pressures are broadening and, importantly, measures of inflation expectations have remained anchored.

These conditions have left the Fed with ample room to take stock of how quickly the removal of policy accommodation is working through the economy. Given the many uncertainties facing the outlook, the Fed’s preference is to carefully and patiently assess the transmission of policy.

Policy outlook

The economy appears to be strengthening, labor market conditions are steady, and inflation expectations remain anchored. As a result, the Fed has time on its side, providing policymakers room to wait for more data. AI-related investment may be booming, but the broader economy is not firing on all cylinders, and elevated geopolitical uncertainty argues for a cautious approach to policy.

That said, with inflation still above target, the direction of travel for policy remains clear. The Fed is taking back some of last year’s rate cuts, and today’s two dissents reinforce that tightening bias. We expect a hike in December and another in early 2027.