Before the interest rate decision to be announced by the US Federal Reserve (Fed) today, markets expect the policy rate to be kept constant in the range of 3.75-4.00 percent. However, the fact that inflation was above the Fed's target raised the question of why the bank, which increased interest rates in September, would choose to wait in October.
The Fed increased the policy rate by 25 basis points to the range of 3.75-4.00 percent on September 16. The decision was taken unanimously by the Federal Open Market Committee (FOMC). The Fed's October 27-28 meeting will end today.
While the possibility of an interest rate increase at the October meeting is priced below 10 percent in the markets, the expectation of a new increase in December has become stronger.
JPMorgan Chase Chief US Economist Michael Feroli stated that the policy difference between the September and October meetings should be explained by Fed Chairman Kevin Warsh.
Feroli reminded that the interest rate was increased in September after the core personal consumption expenditures (PCE) price index, the Fed's preferred inflation indicator, increased by 0.2 percent monthly in August.
Pointing out that the core PCE increase for September is expected to be 0.3 percent, Feroli stated that the market should be explained why the Fed will keep interest rates constant despite a higher inflation data.
JPMorgan also expects the Fed to increase interest rates by 25 basis points before the end of the year, following the September increase. The institution does not foresee this turning into a new long-term interest rate increase cycle.
The main dilemma facing the Fed is between high inflation and the slowdown in the labor market.
While customs tariffs, the rise in energy costs and strong demand kept price pressures alive, the fact that only 29 thousand jobs were recorded in the US economy in September raised question marks about further tightening of monetary policy.
In the Fed's September decision, the fact that inflation remained above the target was cited as one of the main reasons for the 25 basis point increase in the policy rate. According to JPMorgan, core PCE inflation remaining above 3 percent through 2026 poses a significant risk to the Fed's credibility on price stability.
Despite the strong market expectation that interest rates will be kept constant, it is considered that differences of opinion may arise within the FOMC.
Cleveland Fed President Beth Hammack, Dallas Fed President Lorie Logan and Minneapolis Fed President Neel Kashkari are among those who may express their views on tighter monetary policy.
Market participants will therefore closely monitor the voting distribution as well as the decision text.
Before the Fed decision, there was an increase in dollar and US Treasury bond yields.
The DXY index, which shows the performance of the dollar against six major currencies, increased by 0.1 percent to 102.417.
The US 10-year Treasury bond yield increased by 1.4 basis points and reached 5.005 percent.
Zaheer Anwari from The Revacy Fund stated that markets expect interest rates to be kept constant in October and tightening to continue in December.
The dot chart showing members' interest expectations and the Summary of Economic Projections will not be updated at this meeting of the Fed.
For this reason, the focus of the markets turned to the messages Warsh would give at the press conference rather than the interest rate decision itself.
According to JPMorgan's assessment, one of the main reasons for the Fed to wait in October may be that time is needed to see the effects of the interest rate increase in September on the economy.
The Fed's interest rate decision will be announced at 21.00 Türkiye time. Warsh's press conference will start at 21.30. Markets will focus on why the Fed paused interest rate hikes despite high inflation and what signal it will give for a new increase in December.
