TD Securities strategists anticipate that the Federal Reserve will maintain the Fed Funds rate at 4.00% during the October FOMC meeting, despite recent strong inflation and labor market data. This pause is expected to increase the likelihood of rate hikes in December and March of next year. The strategists warn that a single poor inflation report or robust labor data could push the Fed to consider larger tightening measures sooner.
The FOMC is likely to hold rates steady next week, setting the stage for potential hikes later in the year. A hawkish message on inflation could help reassure markets that the Fed remains committed to tightening policy, even without explicit forward guidance.
Under current conditions, with a strong labor market and persistent inflation, the tightening cycle is expected to resume. The December rate hike is considered highly probable, with the October pause raising the bar for avoiding further increases this year.
The strategists emphasize that the market is sensitive to any signs that the Fed is falling behind the curve. A notably bad inflation report or strong labor data could quickly shift expectations toward a 50 basis point rate increase in upcoming meetings.