The FOMC Meets in the Shadow of the Midterms. Nobody Is Comfortable.

The Federal Open Market Committee meets on October 27 and 28. The target range sits at 3.75% to 4.00%. The market puts the odds of a hold at roughly 90%. The same market puts the odds of a December hike at 68.9%. The numbers are clean. The situation is not.

A hold is not a decision. A hold is a postponement. The Fed raised rates in September. The vote was unanimous. The minutes said most officials expected another hike before the year ended. Then the data arrived. Inflation stayed high. Hiring slowed. The midterms moved closer. The Fed now has to stand still in public while leaning forward in private. That is the trap. The trap is not whether the Fed hikes in October. The trap is that the Fed has already told the market what it wants to do, and the calendar will not let it do it yet.

This is not a preview about a non-event. This is a preview about the gap between what the Fed says and what the Fed can do.

The Numbers Do Not Agree

The Fed has two mandates. The mandates are not cooperating.

Inflation sits at 3.7%

Headline CPI rose 0.6% month-over-month in September. That was the largest monthly increase since April. The year-over-year rate landed at 3.7%. Core CPI came in hotter than consensus, rising 0.3% against an expected 0.2%. Energy did the loud work. Recreation, used cars, education, and airline fares did the quiet work.

The Fed's target is 2%. The Fed is not close. The direction is not the problem. The problem is the pace. Inflation is not accelerating. It is not falling. It sits there, like a stain that will not lift.

Unemployment sits at 4.2%

Nonfarm payrolls rose by 29,000 in September. Consensus was 90,000. The unemployment rate ticked up to 4.2%. Labor supply still looks tight. Layoffs remain limited. The underemployment rate slipped. This is not a labor market in distress. This is a labor market that is exhaling.

The Fed wants a cooler labor market. A cooler labor market helps bring inflation down. But a cooler labor market also makes the case for patience. If hiring is slowing, the Fed can wait. If the Fed can wait, December becomes the meeting that matters. October becomes a formality.

Wages are cooling

Average hourly earnings grew 3.0% over the past year. That is the smallest annual gain since 2021. Workers are less willing to quit. They are less aggressive about pay. That is the kind of soft data that supports a hold. It does not support a hike. It supports a hold with a warning attached.

The numbers do not agree. Inflation says hike. Employment says wait. The Fed has to choose which number to believe. It will choose both. It will say the inflation number out loud and whisper the employment number.

The Hawkish Hold

A hold can mean many things. A hold can mean the Fed is done. A hold can mean the Fed is confused. A hold can mean the Fed is waiting for permission. This hold will mean something else. This hold will mean the Fed wants the market to know that December is live.

The phrase for this is a hawkish hold. DWS首席美国经济学家Christian Scherrmann used the phrase before the meeting. He wrote that a hawkish hold appears more likely than a direct hike. Inflation remains high. Employment momentum is weakening. Core PCE is expected to remain stable. Those conditions support standing still while keeping the next move on the table.

What the statement will say without saying it

The statement will not announce a hike. It will not announce a pause with a promise of cuts. It will repeat the commitment to returning inflation to 2%. It will note that economic activity remains solid. It will mention that the Committee remains attentive to inflation risks.

The statement will do something else. It will contain a sentence that the market will read three times. That sentence will signal that the Committee is not done. It will not name December. It will not name a number. It will leave a door open. The market will walk through that door.

The dissents that matter

The decision will likely be unanimous or near-unanimous. The vote will not be the story. The dissents will be the story. Karen Manna, fixed income strategist at Federated Hermes, told Bond Buyer that the vote may prove more revealing than the decision itself. She said she would not be surprised to see as many as three dissents favoring a hike.

Three dissents would be a message. Three dissents would say that the consensus is cracking. Three dissents would say that some officials believe the Fed is already behind. The market will count the dissents the way a nervous passenger counts the exits.

The December Trap

December is the meeting the market has already priced. The CME FedWatch tool puts the probability of a 25-basis-point hike in December at 68.9%. The probability of a hold is 23.8%. The probability of a 50-basis-point hike is 7.3%. The market has made its bet. The Fed has not confirmed it. That is the trap.

Why the market believes the Fed

The market believes the Fed because the Fed has told the market what to believe. The September minutes said most officials expected another hike before year-end. Boston Fed President Susan Collins said she expects it will be appropriate to raise rates further before the end of the year. She said the timing would depend on incoming data. She said the need for further action depends on how the totality of the data shapes the outlook.

The market heard "before the end of the year." The market heard "further action." The market built a December hike into the price. The Fed did not object.

Why the Fed believes itself

The Fed believes itself because the alternative is worse. The alternative is to admit that the hiking cycle is over while inflation sits at 3.7%. That admission would loosen financial conditions. It would lower mortgage rates. It would boost equities. It would undo some of the tightening the Fed has already achieved.

Fed Chair Kevin Warsh does not want to undo the tightening. He also does not want to hike into a slowing labor market six days before a midterm election. He wants to wait. He wants to sound tough while doing nothing. The market is willing to let him wait. The market is not willing to let him pretend the waiting is the end.

The trap is that the Fed has promised a hike it may not want to deliver. If the data improves before December, the Fed hikes and the market yawns. If the data weakens, the Fed holds and the market reprices everything. Either way, October is not the decision. October is the setup.

The Election Six Days Away

The midterms are on November 3. The FOMC decision lands on October 28. The Fed has historically avoided raising rates right before an election. That tradition broke in 2022 when inflation forced the panel to move on November 2. The tradition will not break this time. The hold is too easy. The hold is too safe. The hold is too useful.

The election is not the reason the Fed will hold. The election is the reason the Fed will hold without saying the election is the reason. A hike six days before voters go to the polls would become a political event. A hold six days before the polls is a non-event. The Fed prefers non-events.

Melissa Cohn, regional vice president of William Raveis Mortgage, told InvestmentNews that the Fed faces "a massive conundrum: a major equities meltdown, weaker economic data, and oil prices that keep rising." She said she thinks the Fed will hold this week. She also said that if oil prices continue to soar, the Fed should raise rates in December.

The election will pass. The oil prices will not. The Fed knows this. The hold is not about the election. The hold is about buying time until the election is over.

What Warsh Will Not Say

Kevin Warsh is not Ben Bernanke. He is not Janet Yellen. He is not Jerome Powell. He does not believe in forward guidance. He has refused to submit dots for the Summary of Economic Projections. He has created task forces. He has changed the communication strategy. The press conference will be the main event. The statement will be a formality.

Manna told Bond Buyer that bond market participants will focus less on the decision and more on what Warsh signals about the path ahead. They will watch for any shift in the inflation outlook. They will watch for signs of disagreement. They will watch for whether December remains firmly in play.

Warsh will not say "we will hike in December." He will not say "we are done." He will say something that sounds like both. He will say the Fed is data-dependent. He will say the Fed is committed to its target. He will say the Fed is watching the risks. The market will parse the pauses. The market will parse the adjectives. The market will decide what Warsh meant. Warsh will not correct the market.

The silence is the signal. The signal is that the Fed wants to keep the option open. The signal is that the Fed is not comfortable. The signal is that the trap is real.

The Trap Is Not a Prediction. It Is a Condition.

The FOMC will hold rates on October 28. The target range will stay at 3.75% to 4.00%. The statement will be hawkish. The dissents will be few but loud. The press conference will be careful. The market will price December at roughly two-in-three. The trap will remain.

The trap is not that the Fed will make the wrong decision. The trap is that the Fed has made the decision harder than it needed to be. By promising a December hike, the Fed has turned October into a waiting room. By holding in October, the Fed has told the market that December is the only meeting that matters. By the time December arrives, the data may have changed. The election will be over. The oil prices may have moved. The labor market may have softened further. The Fed may have to choose between its promise and its judgment.

That is the trap. It is not a prediction. It is a condition. The condition is uncertainty dressed as confidence. The condition is a central bank that wants to look tough while doing the cautious thing. The condition is a market that has already decided what the Fed will do and a Fed that has not fully decided whether the market is right.

The Fed will hold. The Fed will sound like it might not. The market will believe the sound. December will come. The trap will still be there.

The only honest thing to say about the October FOMC meeting is that it is not the meeting. It is the meeting before the meeting. The meeting before the meeting is where the trap is set.