08.10.2026 - Fed Rate Hike - October or December?
Yesterday’s publication of the FOMC meeting minutes showed most policymakers indicated that another rate increase would likely be appropriate before the end of the year.
All participants supported the 25-basis-point rate hike in September, bringing the upper bound of the federal funds target range to 4.00%.
Investors largely expect the Fed to remain on hold at its next meeting, while pricing suggests approximately a 70% probability of another hike in December.
Meanwhile, US inflation expectations are rising again. According to the New York Federal Reserve’s latest Survey of Consumer Expectations, inflation expectations for the next 12 months climbed to 3.9% in September, up 0.3 percentage points from August and reaching their highest level since May 2023.
Households also expect spending growth to accelerate to 5.5%, similarly increasing by 0.3 percentage points and reaching its highest level since May 2023.
Markets:
Equities: Moving lower today, pressured by rising oil prices
Bonds: yields retreating from recent highs - US 2y yield above 4.76%, US 10y yield above 5.24%, Japan 10y yield 3.09%
Commodities: Oil prices rising, WTI at USD 91/barrel and Brent around USD 104/barrel;
Precious metals prices mixed, gold up at USD 4’125/oz, silver down at USD 59/ozCurrencies: US dollar almost unchanged - Japanese Yen stable USDJPY 158
Cryptos: slump - Bitcoin around USD 81k
Volatility: The VIX index remains low close to 16 (good opportunity for hedging!)
My View: I remain among the few expecting the Fed to raise interest rates again in October.
Market consensus continues to favor a pause ahead of the US elections, as there was never one in the past before the midterms.
I believe this expectation may prove overly optimistic. Despite political efforts to bring oil, gasoline and fuel prices lower, energy markets are moving in the opposite direction.
Oil prices are rising again as concerns about supply disruptions and fuel shortages intensify. Renewed attacks on tankers highlight the fragility of the recent recovery in Middle Eastern energy flows.
At the same time, the Middle East conflict risks expanding rather than de-escalating.
Reports of Pakistan and Turkey becoming more involved in supporting Saudi Arabia against the Houthis in Yemen raise concerns about a broader regional confrontation.
Meanwhile, the US is reportedly considering new military options against Iran, although President Trump has indicated that further action would not take place before the midterm elections.
The risk of another escalation is increasing, while the window for a diplomatic solution is narrowing.
I see little prospect of resolving the underlying problems in the short term.
Even if crude oil shipments continue to recover, shortages of refined products remain a serious concern. Strategic reserve releases can temporarily relieve supply pressure, but they do not create additional production capacity. And strategic reserves are already at historic lows.
I continue to expect persistent fuel shortages to keep energy prices elevated. Furthermore, transportation costs are skyrocketing. Prices for ships and salary for captains see new highs, adding further energy price and inflationary pressure across the economy.
This brings us back to the Federal Reserve. As Fed Chair Kevin Warsh recently emphasized: “The inflation is too high for too long.”
With inflation expectations rising and energy costs increasing again, I believe the Fed has considerably less room to remain on hold than markets currently anticipate.
An October rate hike remains my base case. Equity markets appear largely unprepared for such a scenario. The bond market, however, has already begun reflecting the growing inflation, monetary tightening and debt risks.
Even after the recent retreat in yields, I continue to see significant upside pressure on government bond yields.
For equities, the combination of persistently high energy prices, elevated financing costs, weakening economic momentum and further monetary tightening creates an increasingly challenging environment.
Yet equity valuations remain elevated, and volatility continues to suggest remarkable investor complacency.
When will the equity market finally correct? Timing remains impossible to predict. The recent resilience of equities has certainly lasted longer than I expected.
However, the fundamental risks have not disappeared. On the contrary, several have intensified.
I repeat my warning: I believe this may be one of the last opportunities to reduce equity exposure before a potentially significant market correction.
Markets can ignore deteriorating fundamentals for a surprisingly long time. But when expectations finally adjust to reality, the adjustment can be abrupt, and markets may overshoot in the opposite direction.
Become a Member to access more valuable market updates like this
