Fed Rate Decision Preview: Will Kevin Warsh Hold Rates at 4% and Signal a December Hike?

Key Takeaways

• The Federal Reserve is widely expected to keep the federal funds target range unchanged at 3.75%–4.00% on October 28.
• Interest-rate futures imply a probability of more than 90% that the Fed will pause, leaving only a small chance of a second consecutive increase.
• September CPI rose 3.7% year over year, while producer prices recorded their largest monthly increase since 2022.
• Weak employment growth gives policymakers a reason to wait, but oil near $115 and rising inflation expectations keep a December hike under consideration.
• Markets will focus on Kevin Warsh’s comments about inflation, financial conditions and the conditions required for another rate increase.

The Federal Reserve is expected to leave interest rates unchanged this week, but Chair Kevin Warsh may use the decision to keep the possibility of a December hike firmly on the table.

The Federal Open Market Committee will meet on October 27 and 28. Its policy statement is scheduled for 2:00 p.m. Eastern Time on Wednesday, October 28, followed by Warsh’s press conference at 2:30 p.m. For UAE investors, the announcement will arrive at 10:00 p.m., with the press conference beginning at 10:30 p.m.

After raising the target range by 25 basis points to 3.75%–4.00% in September, policymakers must decide whether accelerating inflation requires another immediate increase or whether weakening employment justifies a temporary pause.

What Is the Fed Expected to Do?

Financial markets overwhelmingly expect the Fed to keep the federal funds rate at 3.75%–4.00%.

CME-linked futures pricing implies a probability of more than 90% that rates will remain unchanged, while the estimated likelihood of a 25-basis-point increase is approximately 9%–10%.

That represents a significant change from late September, when the probability of an October hike briefly approached 70%. Expectations shifted after a weak employment report and comments from several Fed officials indicating that consecutive increases were not necessary.

A pause would not necessarily mark the end of the tightening cycle. Most Fed officials projected at least one additional increase before the end of 2026, and futures markets continue to assign a high probability to a move in December.

The most likely policy path is therefore:

The October meeting will not include a new Summary of Economic Projections or dot plot. Investors must therefore rely on changes in the policy statement and Warsh’s press conference to assess the direction of rates.

Why the Fed May Hold Rates in October

The strongest argument for a pause is the weakening US labour market.

Nonfarm payrolls increased by only 29,000 in September, far below the consensus forecast of 84,000. August’s increase was revised down to 133,000 from the initially reported 162,000, while July was revised to a loss of 10,000 jobs.

The unemployment rate increased from 4.1% to 4.2%, and average hourly earnings rose only 0.1% for the month.

The report suggests that the US economy has entered a “low-hire, low-fire” environment. Layoffs remain relatively limited, but businesses are becoming more cautious about hiring as financing, energy and labour costs remain elevated.

Raising rates again immediately after September’s increase could place additional pressure on employment, housing and business investment before policymakers fully understand the effect of the previous move.

Political timing may also encourage caution. The decision comes less than a week before the November 3 midterm elections. Although the Fed formally operates independently of the government, an unexpected rate increase could attract criticism that policymakers are influencing economic conditions immediately before voting.

Inflation Is Moving in the Wrong Direction

The argument for another rate hike is that inflation has reaccelerated.

The Consumer Price Index rose 0.6% in September, following a 0.4% increase in August. Annual headline inflation climbed to 3.7%, well above the Fed’s 2% target.

Gasoline was a major contributor, but price pressures were not limited to energy. Core CPI, which excludes food and energy, increased 0.3% for the month and 2.6% from a year earlier. Shelter costs remained elevated, while airfares were 22.4% higher than a year ago.

Producer inflation was even stronger. The Producer Price Index rose 1.3% in September, its largest monthly increase since 2022 and more than twice the expected 0.6% gain.

Prices for final-demand goods jumped 2.6%, the largest increase since the series began in 2009. Energy costs surged 10.8%, while gasoline prices increased 20.3%. The measure excluding food, energy and trade services rose 0.5% for the month and 5% from a year earlier.

These figures create a credibility challenge for the Fed. Pausing immediately after such strong inflation data could be interpreted as tolerance for above-target price growth unless Warsh clearly explains why officials are willing to wait.

Oil Above $115 Complicates the Decision

Energy prices have continued rising since the September inflation reports were collected.

Brent crude ended last week at $116.72 per barrel before pulling back toward $115 on Monday. WTI remained above $100.

Attacks on Saudi infrastructure, threats to Gulf shipping and the possibility of renewed US and Israeli military action against Iran have sustained a substantial geopolitical risk premium.

High oil prices affect monetary policy through several channels:

• More expensive gasoline directly increases headline inflation.
• Higher freight and production costs can spread into food and consumer goods.
• Businesses may raise prices to protect margins.
• Households may demand higher wages to compensate for reduced purchasing power.
• Consumer spending may weaken as more income is directed toward fuel and utilities.

The Fed normally looks through temporary energy shocks. However, policymakers may respond if high oil prices begin lifting longer-term inflation expectations or spreading into services and wages.

What Could Kevin Warsh Say About December?

Warsh’s communication will matter more than the widely expected rate decision.

Since becoming Fed chair, he has generally avoided detailed forward guidance, arguing that policy decisions should be made at each meeting rather than signalled far in advance. That approach has increased market sensitivity to relatively small changes in his language.

Investors will listen for comments in four areas.

Inflation Risks

If Warsh describes inflation as broadening, persistent or increasingly influenced by energy prices, markets may interpret the remarks as preparation for a December hike.

A more balanced description acknowledging both inflation and weaker employment would support expectations of a longer pause.

Financial Conditions

Warsh may argue that financial conditions remain too loose despite September’s rate increase. Credit spreads are still relatively narrow, equity valuations remain elevated and major companies continue to invest heavily.

If the Fed believes financial conditions are not restrictive enough to return inflation to 2%, another rate increase becomes more likely.

The Labour Market

A focus on September’s weak payroll growth would support the decision to pause. However, Warsh could note that the 4.2% unemployment rate remains low by historical standards and layoffs are still limited.

That would allow the Fed to acknowledge softer hiring without concluding that the labour market requires immediate policy support.

December Policy

Warsh is unlikely to promise another increase. However, phrases such as “further adjustment may be appropriate” or “inflation risks remain tilted to the upside” would preserve a hawkish bias.

Conversely, an emphasis on patience, accumulated tightening and downside risks to employment would reduce expectations for a December move.

PCE Inflation Arrives After the Fed Decision

The Fed’s preferred inflation measure will be released one day after the meeting.

Economists expect September headline PCE inflation to increase to approximately 3.7% year over year from 3.4% in August. Core PCE is forecast near 3.1%, while the monthly headline index could rise 0.5%.

Because the public data arrive after the rate decision, they cannot directly change the October outcome. Fed officials will nevertheless have internal estimates and may refer broadly to persistent inflation risks.

A hotter PCE report on Thursday could quickly reinforce December hike expectations even if Wednesday’s statement appears relatively neutral.

Third-quarter GDP will also be released Thursday. Strong growth combined with accelerating inflation would strengthen the argument that the economy can tolerate another rate increase. Weak growth would raise concerns that the energy shock is creating stagflation.

How Markets Could React

The 10-year Treasury yield finished last week near 5%, while spot gold opened Monday just below $4,000. Bitcoin traded below $80,000 after recent ETF outflows and leveraged liquidations.

These markets are therefore positioned for a pause, but not necessarily for a dovish message. An unexpectedly hawkish press conference could still generate significant volatility.

Will the Fed Raise Rates in December?

A December increase remains the most plausible next step, but it is not guaranteed.

The case for another hike would strengthen if:

• Oil remains above $110;
• PCE and CPI inflation continue accelerating;
• Inflation expectations move higher;
• Economic growth remains resilient;
• Payroll growth recovers from September’s weak reading.

The case for an extended pause would strengthen if:

• Employment continues deteriorating;
• Consumer spending weakens materially;
• Oil prices retreat;
• Core inflation remains contained;
• Financial conditions tighten through lower equity prices and wider credit spreads.

The most likely outcome this week is a hold at 3.75%–4.00% accompanied by language that keeps further tightening available. Warsh does not need to explicitly promise a December hike. He only needs to signal that September’s increase was not necessarily the final move.