Fed interest rate decision on Wednesday: Take a deep breath
Summary
- The Federal Reserve is expected to keep its policy rate unchanged at 3.75–4.00% on Wednesday, despite ongoing inflationary pressures, with the market anticipating further rate hikes in December.
- In September, the Fed raised its policy rate for the first time since 2023, with a unanimous decision and updated forecasts indicating a more hawkish stance towards inflation.
- Economic indicators suggest a rate hike could be justified now, as inflation accelerated in September and economic growth is expected to have increased in the third quarter, driven by consumption and AI investments.
- The rise in long-term yields to a nearly 25-year high is a concern, prompting Fed officials to signal a preference for waiting for more data before proceeding with another rate hike.
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Automatic translation: Originally published in Finnish 27/10/2026, 06:06 GMT. Give feedback here.
On Wednesday, the Fed will likely keep its policy rate unchanged at 3.75–4.00% and take a deep breath before the next rate hike. However, inflationary pressures have not eased, and the market expects rate hikes to continue in December.
In September, the Fed raised its policy rate for the first time since 2023. The decision was unanimous, and the central bank updated its economic and interest rate forecasts in a more hawkish direction, meaning it is more attentive to inflation. The median of the forecasts still pointed to one more 25 basis point hike this year, and this year's PCE inflation forecast was raised to 3.7%. In addition, the Fed raised its long-term interest rate estimate to 3.2%, which indicates that the central bank's estimate of the neutral rate has risen.
Economic data would warrant a rate hike already now. Inflation accelerated in September, and PCE inflation, to be launched on Thursday, is expected to rise from 3.4% to 3.6%. In addition, price pressures have spread beyond fuel. On the other hand, economic growth is also expected to have accelerated in the third quarter, driven by consumption and AI investments. The unemployment rate is 4.2%, and the number of initial jobless claims has decreased.
A second consecutive hike would now be possible if the 10-year yield had not risen to a nearly quarter-century high following the September hike. The rise in long-term yields is already threatening to slow the economy more than the Fed intended. Among others, New York Fed President John Williams and Vice Chair Philip Jefferson signaled that they want to wait for more data. The market is pricing in a ~90% probability that the rate will remain unchanged. The pause is also supported by the fact that wages have risen slower than inflation for six consecutive months.
Chair Kevin Warsh has a difficult task ahead of him. The decision will be made less than a week before the midterms held on November 3, so the pause must not look political. At the same time, Warsh must maintain the promise of a new hike so that the central bank's credibility as a fighter of inflation does not suffer. However, Warsh does not particularly favor forward guidance, so the press conference may be sparse on details.
As usual, initial comments on the decision will be posted in the Market Directions thread on Inderes Forum at 8:00 pm Finnish time.
