Why is a December hike virtually fully priced in when the Federal Reserve is expected to hold rates this week?

Support for the US Dollar (USD) remains firm across global FX markets ahead of Wednesday’s Federal Reserve policy meeting, where traders expect the Fed funds rate to remain at 3.75–4.00%. With futures markets assigning only 10% odds to an October rate hike, investor attention has quickly turned to resilient US economic growth and continuing price pressures. Forecasts for strong Q3 real GDP growth of around 3.2% annualized, alongside accelerating core PCE inflation, underpin the view of institutional strategists at Brown Brothers Harriman (BBH) and TD Securities that a pause would not signal a dovish shift. Instead, they see it as a tactical step ahead of further tightening in December, preserving the Greenback’s yield advantage.

Why does BBH see a Fed pause sustaining US Dollar strength?

A pause this week would leave the US Dollar well supported, according to Elias Haddad at Brown Brothers Harriman (BBH), who forecasts an unchanged Federal Reserve interest rate range of 3.75–4.00%. He notes that key Fed officials’ preference for patience is consistent with markets assigning just 10% odds to an October hike. With Q3 GDP growth forecast at an annualised 3.2% and September core PCE inflation accelerating to 3.1% year-on-year, however, Haddad sees buoyant private-sector activity and persistent inflation risks underpinning the currency. A December rate increase, meanwhile, is almost fully priced in.

"The FOMC is expected to keep the Fed funds target range steady at 3.75-4.00% after raising rates 25bps in September. Calls for patience from several key Fed officials support a pause. Futures market imply only 10% odds of a hike this week, with a December 9 rate increase virtually fully price in... Overall, robust US economic activity and rising price pressures argue for additional Fed funds rate hikes, offering ongoing USD support... Headline PCE is seen rising 0.5% m/m... and quicken to 3.6% y/y... Real GDP growth is anticipated to rise 3.2% annualized... driven by consumer spending and AI-related business investment."

Could an October hold set up a December rate hike, as TD Securities expects?

An October pause would increase the likelihood of a December rate hike, in the view of Oscar Munoz and Eli Nir at TD Securities. They expect the Fed to retain its policy rate at 3.75-4.00% in October, in line with market expectations, without issuing aggressive new forward guidance. Should inflation data remain firm, they see scope for a larger December increase of 50 basis points (bps). Their outlook for the policy cycle remains hawkish: TD Securities forecasts two additional rate hikes, in December and March, to counter stubborn price pressures.

"We expect the FOMC to keep rates on hold this week despite rising inflation risks. The chance of a surprise hike is higher than normal, but we believe they will prioritize patience and wait until December. A hold in October will make a December hike all the more likely. After the upside surprise in September CPI, inflation risks are still pertinent... We expect the Fed to hike two more times (December and March). Inflation remains above target while risks are growing."

What does a Fed pause mean for the US Dollar?

A strongly supportive environment for the US Dollar would remain in place under the widely anticipated FOMC decision to leave rates at 3.75–4.00%, with the pause representing tactical patience rather than a dovish shift. For BBH, the key supports for the Greenback are accelerating PCE inflation (3.6% year-on-year) and strong Q3 GDP growth (3.2% annualized), fuelled by AI investment. By comparison, TD Securities stresses that holding rates in October makes further tightening in December and March more likely, keeping the US Dollar’s interest rate advantage firmly in place into the coming year.

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)