Fed Expected to Hold Rates Despite Firmer Inflation, With December Hike in Focus

The Federal Reserve is widely expected to leave its benchmark rate unchanged at this week's policy meeting even as inflation data support further tightening, with markets pricing roughly a 90% probability of a hold. The federal funds target range currently stands at 3.75% to 4.00%. September CPI rose 3.7% year-over-year and PPI climbed 1.3% month-over-month. Economists expect Thursday's September PCE price index to accelerate to 3.6% from 3.4% in August, further above the Fed's 2% goal. The labor market remains firm, with unemployment at 4.2% and low initial jobless claims. A key reason for pausing is the recent surge in Treasury yields. After the Fed's September quarter-point hike, the 10-year yield breached 5% and topped 5.3%, a 24-year high, before falling about 19 basis points to 4.95% on Thursday — its largest one-day drop since March 2023. Officials remain divided on the pace of further tightening. Dallas Fed President Lorie Logan has argued for at least another 50 basis points of hikes, while others favor waiting for more data. Santander's Stephen Stanley expects a December hike; BofA's Aditya Bhave still sees a possible surprise move this week.