Fed holds rates ahead of midterms and plans a new meeting schedule

The US Federal Reserve left its benchmark rate unchanged at 3.75-4% after September’s hike and keeping clear of potential political backlash a week before the US midterms. The pause matched the roughly 90% probability markets had assigned it, according to Reuters, and keeps the focus on the quarter-point increase investors have all but priced in for December. Only two members of the Fed’s Open Market Committee voted to raise rates by 25 bps, according to the Fed’s post-meeting press release.

AND- The Fed is planning to change the schedule of its FOMC meetings to allow for more big-picture planning, Fed Chair Kevin Warsh said in a press conference. “We believe eight meetings per year is the right number for the FOMC,” Warsh said. “But in 2027, one meeting will focus exclusively on broad monetary policy strategy, with neither a vote on the federal funds rate nor a policy statement anticipated. The rest will be regular FOMC policy-setting meetings. And I expect that in 2028, we’ll have two meetings dedicated to discussions of strategy, and six for setting policy.”

For now, the strategy for the Fed continues to be price stability, even as inflation continues to run hot. “Economic activity is expanding at a strong pace. While uncertainty remains — owing, in part, to geopolitical developments — domestic spending has been resilient. Productivity growth is strong, and capital investment robust. Job gains have kept pace with the workforce, and the unemployment rate has changed little,” Warsh said.

The case for a pause was laid out in advance: A run of officials spent the weeks before the meeting cooling expectations for an immediate move: Vice Chair Philip Jefferson and New York Fed President John Williams said the central bank had time to assess the economy, and Governor Christopher Waller said the Fed need not tighten at consecutive meetings, Bloomberg reports. Warsh kept his own leaning to himself, telling the IMF meetings in Bangkok he would not prejudge the decision, part of what he calls a “new chapter” in which the Fed stops signaling its next move.

They were leaning against an inflation backdrop that keeps getting harder to ignore. US consumer prices rose in September at their fastest pace in five months, core came in above forecast, and producer prices climbed at their quickest rate in more than four years. The Fed’s preferred PCE gauge is stuck at 3% or above, with the September reading due today.

What worries officials most is where the pressure is coming from. They increasingly trace the pressure to demand they can control — healthy consumer spending and a surge in AI investment — on top of the energy shock from the US strikes on Iran and the lingering drag from tariffs. Brent is also back near USD 114 a barrel, up about 20% since the start of September, and diesel sits close to record highs.

With the pressure broadening, investors have largely stopped asking whether the Fed will hike again and are instead asking how many more times. TS Lombard’s Dario Perkins argues the Fed “will need to keep hiking until its target is in sight,” and could be forced into a run of moves “if the AI bubble doesn’t burst.” Monetary Policy Analytics now sees three more quarter-point hikes in the coming meetings, matching market expectations for quarterly increases through June 2027; the Fed’s own September projections penciled in just one more this year.

For Warsh, the near-term challenge is presentational. His task, MPA’s Derek Tang said, is to frame an October skip without sounding dovish, “against a wide backdrop of an FOMC still set on proving its mettle.”

Several officials see conditions as too loose to bring inflation down, which on its own would argue for tighter policy. Goldman Sachs’s conditions index is close to where it began the year despite September’s hike; a Deutsche Bank survey found 42% of investors calling conditions “moderately accommodative” against just 15% restrictive; and Piper Sandler reckons an effective 3.9% funds rate is still cushioning the economy from 5% bond yields as banks ease lending standards, Reuters reports.

Policymakers are not reading it the same way. “Most of what I’m hearing in my district is that they’re going full steam ahead,” Cleveland Fed ​President Beth Hammack told Bloomberg. Former New York Fed chief William Dudley said Warsh “seems to think financial conditions are important,” but that the view is “not really ingrained” at the institution; Evercore ISI called Warsh’s focus on conditions without a defined framework “a vulnerability.”

MARKETS THIS MORNING-

Asian markets were mixed earlier today. South Korea’s Kospi was fluctuating between -0.1% and 0.4%, while Japan’s Nikkei was up roughly 1%. US equities saw broad overnight gains.

THE CLOSING BELL-

The ADX fell 1.6% yesterday on turnover of AED 1.3 bn. The index is down 4.0% YTD.

In the green: Alpha Data (+3.9%), Aldar Properties (+3.3%), and Presight AI Holding (+2.0%).

In the red: Abu Dhabi Islamic Bank (-5.0%), United Arab Bank (-4.4%), and Burjeel Holdings (-3.5%).

Over on the DFM, the index fell 0.3% on turnover of AED 544.8 mn. Meanwhile, Nasdaq Dubai was up 2.6%.