Fed set to hold rates in October as inflation stays hot, December hike remains on the table

The Federal Reserve is set to leave interest rates unchanged at its October 27–28 meeting, but policymakers are not declaring victory over inflation — they are buying time. After raising the federal funds rate by a quarter point in September, the Fed's policy-setting Federal Open Market Committee is widely expected to hold the target range at 3.75–4.00%, with most economists and market participants treating December as the next live decision point.

The case for pausing is straightforward: officials want to assess how September's hike is filtering through the economy before moving again. New York Fed President John Williams — who also serves as Vice Chairman of the FOMC — has said the Fed has time to gather more information. San Francisco Fed President Mary Daly has made a similar case, telling The Daily Economy that while further tightening will probably be necessary, it does not need to happen immediately.

Chairman Kevin Warsh has corralled support for an October hold among the Fed's most senior leadership, according to KPMG. Vice Chair Philip Jefferson and Williams have each indicated they see no pressing reason to raise rates at back-to-back meetings. Governor Chris Waller, among the more forceful proponents of additional hikes, has nonetheless made clear that increases need not come at every gathering — language that gives the committee room to cast restraint as prudent risk management rather than a softening of its commitment to bringing inflation down.

The debate has shifted from whether the Fed may need to tighten again to when. October looks like a skip; December remains live.— KPMG analysis

The hawks have not gone quiet. At the July meeting, Cleveland Fed President Beth Hammack, Dallas Fed President Lorie Logan, and Minneapolis Fed President Neel Kashkari each voted for a hike rather than the hold the committee chose — a position the full committee then embraced unanimously when it acted in September. Logan is considered the greatest dissent risk for October: she has said rates need to rise at least another half percentage point, though she has acknowledged that tighter financial conditions could reduce the total amount of additional tightening required. KPMG puts a unanimous hold as its central expectation, while noting that a single hawkish dissent from Logan is the main risk to that call.

The inflation data make the Fed's job harder, not easier. The latest available personal consumption expenditures (PCE) figures — the Fed's preferred inflation gauge — showed headline inflation at 3.4% and core PCE at 3.0% for August, both above the 2% target. September PCE data will not be released until after the October meeting. The most current broad reading comes from the September Consumer Price Index, which showed overall inflation rising 0.6% month-over-month and 3.7% year-over-year, up from 3.4% in August, according to The Daily Economy.

Critically, the inflation story is not simply an energy story. Core CPI — which strips out food and energy — was 2.6% higher than a year earlier in September. Service sector prices excluding energy services rose 3.1% year-over-year. Hospital services were up 5.6%, motor vehicle maintenance and repair 5.8%, and food away from home 3.5%. The breadth of those increases makes it harder to attribute current inflation solely to energy disruptions or isolated supply shocks, according to The Daily Economy.

KPMG flags two structural forces that complicate the Fed's task. Energy is the first: reserves that had been drawn on to cushion the early effects of Middle East conflict have been depleted, and refinery damage is expected to hold energy prices higher for longer than analysts thought even a month ago. Diesel costs are expected to feed through into consumer prices in data heading into December. Second, healthcare inflation is accelerating — driven by aging demographics and curbs on immigration that have thinned the supply of foreign-born workers in the care economy — and is not something the Fed can directly address through rate policy.

KPMG notes that the last time healthcare was such a significant inflation driver was the early 1980s, when it remained a primary force well into the 1990s. The oldest members of the baby boom generation turned 80 this year, adding structural pressure to care costs that monetary policy cannot easily offset.

On the spending side, the picture also argues against complacency. The Bureau of Economic Analysis revised second-quarter nominal GDP growth upward twice after its initial estimate — from 7.9% to 8.0% and then to 8.5% — well above the roughly 4% pace that nominal GDP rules suggest is consistent with stable prices, according to The Daily Economy. Real GDP growth for the same period was revised from 1.5% to 2.2%.

Monetary policy rules tracked by the AIER Monetary Rules Dashboard illustrate the tension. Estimates from a modified Taylor Rule and a nominal GDP level rule land in a range of roughly 3.8% to 4.1%, a result broadly in line with keeping rates where they are. But an original Taylor Rule and an NGDP growth rule point to rates well above 5%, according to The Daily Economy. Nine out of 12 rule variants favor tighter policy than the current target range.

The labor market, meanwhile, is giving the Fed less reason to ease off. The unemployment rate stands at 4.2%, which most policymakers consider relatively low. Payroll employment increased by only 29,000 in September — a sharp slowdown — but The Daily Economy notes that slow job growth may reflect structural factors such as low net migration and an aging population entering retirement, rather than the kind of deterioration that would call for looser policy.

A separate concern flagged by KPMG is financial stability. Higher borrowing costs and elevated long-term yields have already raised stress in some markets, and the Fed wants to avoid triggering deeper problems. Incremental quarter-point increases interspersed with pauses let policymakers continue tightening while watching for vulnerabilities that have yet to surface — a pace deliberately slower than the one set in 2022.

Chairman Warsh has already shortened post-meeting press conferences and is expected to preserve optionality rather than signal the committee's next move. Minutes from the October meeting will be released in November and are likely to reveal more of the internal debate. The September minutes made clear that most participants viewed at least one more increase as likely appropriate before year-end — an indication that the October pause represents a delay rather than a change in direction.

Why it matters — The Fed's October pause sets up December as the next critical decision point for millions of Americans whose borrowing costs — on mortgages, car loans, and credit cards — move with the federal funds rate, while persistent inflation continues to erode purchasing power.

Reported by reuters.com, kpmg.com, thedailyeconomy.org