The Fed Is Suddenly on Hold. When Could It Start Hiking Interest Rates Again?

The Federal Open Market Committee (FOMC) recently decided to keep the federal funds rate target between 3.75% and 4%, avoiding any changes after a quarter-point increase in September. Inflation remained stubbornly high at 3.7% year-over-year, exceeding the Fed's 2% goal, and was further compounded by uncertainty stemming from geopolitical tensions.

While acknowledging the elevated inflation, the committee stated their intent to collect more data before any additional rate hikes. This cautious approach, according to Fed Chair Kevin Warsh and the majority of the FOMC members, aims to safeguard the labor market, economic growth, and financial markets. Market futures indicate a 76% probability of a quarter-point rate hike during their final meeting of the year, on December 8-9.

Furthermore, there is a 76.5% likelihood of at least one more rate increase in 2027, with a 43% chance of two or more hikes. This "hawkish hold" suggests the Fed is leaning toward rate hikes rather than cuts. Notably, two dissenting committee members advocated for a rate hike in October, emphasizing their commitment to combating inflation.

Investors should monitor the pace of future Fed rate increases, as research indicates that slower rate hikes tend to foster stronger market performance and economic growth compared to rapid hikes, which often exacerbate market declines. Fed Chair Kevin Warsh appears to be a gradualist in his approach, which is favorable for investors.