The Federal Reserve may hold interest rates steady in October, with markets putting the odds of a hike at just 15%. But rising inflation and higher oil prices could push it to raise rates again in December. 

As a result, markets now see an 89% chance of a 25-basis-point December hike, which would lift the Fed’s benchmark rate to 4.00%–4.25%.

Fed Rate Hike Odds Fall To 15% Ahead of October Meeting

The U.S. Federal Reserve raised its benchmark interest rate by 25 basis points in September, taking the target range to 3.75%–4.00%. It was the first rate hike in more than three years.

After the September increase, investors expected another hike in October. Perhaps after New York Fed President John Williams said there was no urgency to raise rates again immediately, as we have time to gather more information.

This has lowered expectations for an October rate hike, bringing the odds down to 44%.

Now, during a fireside chat with International Monetary Fund Managing Director Kristalina Georgieva in Bangkok, Federal Reserve Chair Kevin Warsh avoided signaling the central bank’s next move.

“I don’t believe in saying now what I might do at the meetings that we have in the balance of this year.”

Following his remarks, markets now see an 85% chance that the Fed will hold rates steady in October, while the odds of a rate hike have fallen to around 15%.

Why the Fed May Pause in October

The timing of the October meeting could also influence the decision. The Fed may prefer to avoid a major interest rate change just before the November 3 midterm elections to avoid political pressure. Its October 27–28 meeting falls just days before voters head to the polls.

If the Fed raises or cuts rates, politicians could blame it for higher borrowing costs, rising prices, or slower economic growth. To avoid appearing to favor either party, officials may choose to wait until after the election.

By then, the Fed will have more economic data on inflation and jobs to help guide its decision. 

December Rate Hike Is Possible, Odds Say 89% 

However, a pause in October would not rule out another rate hike in December. U.S. inflation has already risen to 3.7% in September, up from 3.4% in August, keeping price growth well above the Fed’s 2% target.

Even oil prices have climbed above $106 a barrel amid tensions in the Middle East. Higher energy and transport costs could keep inflation elevated and make it harder for the Fed to leave rates unchanged for long.

Investors are already preparing for this possibility. Markets have priced in an 89% probability of a 25-basis-point rate hike in December, which would lift the target range to 4.00%–4.25%.