Fed Expected to Hold Rates at 3.75%-4% as Falling Treasury Yields Complicate Warsh's Inflation Messaging

Federal Reserve Chair Kevin Warsh faces a communication challenge at the October 27-28 meeting: holding rates steady while convincing markets the Fed remains committed to fighting inflation, after a bond rally reversed the yield surge that had argued for a pause. Rate futures priced a 90% probability of no change as of Friday, with the benchmark rate expected to stay at 3.75%-4%. The 10-year Treasury yield had climbed to a near quarter-century high after September's hike, prompting officials including New York Fed President John Williams and Vice Chair Philip Jefferson to signal patience. Yields have since retreated as AI-demand doubts triggered equity selling and drove flows into government debt. Nationwide chief economist Kathy Bostjancic said data since the last meeting—strong growth, consumption and hiring, with inflation moving the wrong way—argued for a hike this week. EY-Parthenon's Gregory Daco warned that if Warsh fails to keep a future hike in play, markets could doubt the Fed's resolve, pushing yields higher and inflicting greater economic damage than a rate increase. September PCE inflation, due the day after the decision, is forecast to rise to 3.6% year-over-year from 3.4%, with airfares, rent and computers adding pressure beyond energy. September unemployment stood at 4.2%. BMO's Scott Anderson expects the decision to be closer than priced, with Cleveland Fed President Beth Hammack possibly dissenting, and sees two more hikes needed.