Federal Reserve: October hold raises December hike odds - TD Securities

TD Securities strategists expect the Federal Reserve (Fed) to keep the Fed Funds rate at 4.00% at the October FOMC meeting, despite strong inflation and solid labor data. They see this pause increasing the likelihood of rate hikes in December and March, while warning that one bad inflation print could force earlier and possibly larger tightening.

October pause, December hike risk

"The FOMC is likely to remain on hold in October, raising the likelihood of a December hike while increasing the risk that officials fall behind the curve. Warsh is unlikely to offer forward guidance, but a hawkish inflation message could ease credibility concerns and encourage markets to price further tightening."

"Under a context of a labor market that remains in good shape, such an inflation backdrop would advocate for a continuation of the tightening cycle at the October meeting. Indeed, that was our initial expectation."

"As a result, we expect the FOMC to keep rates steady next week, and to resume tightening in December and March next year."

"Barring an unexpected shock, the December rate hike is all but locked in. In other words, pausing next week will set the bar high for avoiding an additional rate increase this year."

"But the opposite is also true: the bar is low for the market to feel that the Fed is falling behind the curve. It only takes one notably bad inflation report and/or a collection of strong labor market data for the market to start pricing larger odds of a 50bp rate increase in upcoming meetings."