Looking Ahead to Tonight's Federal Reserve Meeting: A Pause in Rate Hikes in October is Almost Certain, How It Affects December Rate Hike Probabilities Becomes the Focus

On October 28, the Federal Reserve will announce its October interest rate decision tonight (2 AM Beijing time on the 29th). The market widely expects the federal funds rate target range to remain unchanged at 3.75%-4.00%, with a probability of maintaining the status quo at over 90%. The real highlight is not the pause itself, but the wording of the Federal Reserve's statement and whether Chair Powell will release more hawkish signals during the press conference. The focus is on how the meeting will affect the market's already significantly priced-in probability of a 25 basis point rate hike in December. Several institutions have provided their outlook on the Federal Reserve's meeting as follows:

Goldman Sachs: Expects the Federal Reserve to pause rate hikes in October and raise rates by 25 basis points in December. If the FOMC continues the pattern of hiking every other meeting in 2027, it may consider raising rates again in March. However, our baseline forecast does not anticipate a rate hike in March, as inflation trends are expected to improve.

Citigroup: Expects the Federal Reserve to pause rate hikes in October and raise rates by 25 basis points in December. However, if the stock market continues to weaken, leading to a sharp tightening of financial conditions, the likelihood of the Federal Reserve shifting to a rate cut will significantly increase.

Moody's: The Federal Reserve will not raise rates again at this week's meeting and should not do so. The U.S. economy is facing an increasing number of risks, and the Federal Reserve's missteps are one of them. The bond market is a reason for the Federal Reserve not to rush to tighten financial conditions.

Farm Credit: Expects the Federal Reserve to pause rate hikes in October and raise rates by 25 basis points in December. The mainstream willingness of decision-makers leans towards maintaining rates; although current inflation data has widened decision-making differences, it has not reached the threshold that forces the Federal Reserve to act immediately in October.

Nomura Securities: Expects the Federal Reserve to keep rates unchanged in October. Statements from dovish officials, emerging credit pressures, and the upcoming midterm elections all favor a pause in rate hikes this time. The Federal Reserve is guiding the market to form expectations of a pause in October while retaining sufficient policy flexibility for a rate hike in December.

TD Securities: Expects the Federal Reserve to keep rates unchanged in October. The possibility of an unexpected rate hike is higher than normal, but we believe the committee will prioritize patience and wait until December to act. A pause in October will make a December rate hike more likely. We expect the Federal Reserve to raise rates twice more, in December and March.

Huatai Securities: Recent economic data is mixed, but most Federal Reserve officials have expressed a reluctance to raise rates consecutively, and financial conditions have also tightened somewhat. It is expected that the October meeting will maintain rates unchanged, with possibly two hawkish votes against. In the baseline scenario, the Federal Reserve is expected to raise rates once more in December this year and twice next year.

Morgan Stanley: We expect the Federal Reserve to keep rates unchanged in October while signaling to the market that further tightening of policy is still possible in the future. We expect the Federal Reserve to raise rates by 25 basis points in December and March next year, with overall risks still leaning towards additional tightening.

BNY Mellon: Expects the Federal Reserve to pause rate hikes in October and raise rates by 25 basis points in December. We expect that rates will not be steadily raised at every meeting but will peak at slightly above 4.5%, which means there will likely be three more rate hikes by this time next year.

Bank of America: The Federal Reserve has ample reason to raise rates in October. If it pauses in October, the Federal Reserve will only retain one option to act; if it raises rates in October, it can maintain flexibility to continue raising rates in December, aligning the rate hike cycle more closely with expectations for rate cuts in 2024 and 2025. Given the more threatening inflation data, the latter option holds greater strategic value.

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