December hike nearly fully priced in despite Federal Reserve’s expected rate hold this week

The Federal Reserve is expected to hold the Fed funds rate at 3.75–4.00% on Wednesday. That outlook continues to support the US Dollar (USD) across global FX markets. Futures markets assign just 10% odds to an October rate rise, shifting investor attention towards resilient US growth and persistent inflation. Forecasts put Q3 real GDP growth at around 3.2% annualised, alongside accelerating core PCE inflation. Against that backdrop, strategists at Brown Brothers Harriman (BBH) and TD Securities regard the anticipated pause as a tactical step towards further tightening in December, rather than a dovish shift, preserving the Greenback's yield advantage.

US Dollar strength: BBH sees support from Fed pause

A 3.75–4.00% rate hold is Elias Haddad's forecast for this week's Federal Reserve meeting. The Brown Brothers Harriman (BBH) strategist notes that key Fed officials' preference for patience aligns with market pricing of only a 10% chance of an October increase. Yet forecasts for 3.2% annualised Q3 GDP growth and September core PCE inflation accelerating to 3.1% year-on-year point to vigorous private-sector activity and persistent inflation risks. Haddad argues that these conditions will sustain firm US Dollar support, with a December rate rise virtually 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."

October hold sets up December rate rise, TD Securities expects

An October policy rate hold at 3.75-4.00% is the forecast from Oscar Munoz and Eli Nir of TD Securities. They expect the Fed to meet current market expectations without issuing aggressive new forward guidance. In their assessment, an October pause increases the likelihood of a December rise, potentially by a larger 50 basis points (bps) if inflation readings remain firm. Their outlook for the cycle remains hawkish: TD Securities anticipates two further rate increases, in December and March, to address 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."

US Dollar outlook: rate advantage holds

Tactical patience, not a dovish shift, underpins the widely anticipated FOMC decision to leave rates at 3.75–4.00%. This keeps the policy backdrop highly supportive for the US Dollar. For BBH, accelerating PCE inflation at 3.6% year-on-year and strong Q3 GDP growth of 3.2% annualised, fuelled by AI investment, are central to continued demand for the Greenback. Meanwhile, TD Securities stresses that holding rates in October increases the prospect of further tightening in December and March, 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.)