A Pause in the Action

The Federal Reserve held interest rates steady at this week's meeting, so the next possible rate hike won't be until December. While this was widely expected, the fact of the matter is, oil prices are still high and there's been no progress on bringing inflation down.

So my blunt take is that there should have been a rate hike. The economic data supports it, and even two of the 12 committee members thought so.

Speaking of meetings, it's worth noting that Fed Chairman Kevin Warsh made another move toward reducing communication from the Fed. He announced that there will still be eight FOMC meetings in 2027, but one of them will focus exclusively on monetary policy strategy and will not include a rate decision or statement. In 2028, there will be two meetings without a rate decision or statement.

Pause and Catch Up?

Here's the problem for the coming months: Oil prices are likely to stay high as long as the war in Iran continues. That means inflation is likely to stay high too.

Plus, over the next few months, inflation rates are likely to be pushed higher due to some leftover effects of the 2025 government shutdown: a portion of shelter prices were not collected in October 2025, and were assumed to be flat. That skewed the overall Consumer Price Index (CPI) lower from October 2025 through March 2026. Since CPI is usually compared to the same month the year before, that means the next few months of inflation data will be compared to lower readings.

Given the Fed's almost singular focus on the inflation part of its mandate, many are having trouble finding justification for why they didn't hike rates. The Fed's message was that they need more data before making the next move, despite still being in a hiking bias. Between now and the next meeting on Dec. 9, we will get one CPI report and two Personal Consumption Expenditures (PCE) reports. Barring an end to the war in the Middle East, I don't expect any of those reports to say that inflation came down meaningfully.

So it's very possible we start hearing chatter about a 50 basis point hike in December if the Fed needs to play catch-up.

Market Messages

Volatility is a mainstay on Fed days because markets are trying to digest the message and set expectations. A Fed that's not providing forward guidance and a chairman who refuses to submit a dot on their quarterly dot plot has made this quite a challenge.

One of the most interesting things Warsh did during the press conference was reference the volatility we've seen in markets. This is an acknowledgement that stock investors are being more discerning in the AI trade and credit spreads have widened.

Perhaps the Fed didn't raise rates because officials didn't want to kick risk assets while they're down. Although I respect that consideration, it's not their job to protect risk assets. It's their job to promote full employment and stable prices, both of which are economic measures, not market measures.

I worry that markets will be dealing with even more uncertainty than they already were with a Fed that doesn't seem committed to its own strong statements. Barring a surprise collapse in oil prices, I don't think much will change in the data between now and the December meeting.

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