The Federal Reserve will not raise interest rates next week; what conditions would be needed to change this outcome?

　　

On October 28, the Federal Reserve

　　

　　The only scenario I can imagine that could possibly prompt the Federal Reserve to raise rates is if Iran unexpectedly reaches a peace agreement. In that case, oil prices would plummet, long-term bond yields would fall sharply, and financial conditions would become significantly loose. The Fed could step in to hedge against this situation. However, it's hard to admit, but the likelihood of such a peace agreement before the midterm elections is extremely slim. For this to happen, the US would have to accept Iran’s terms, and before November 3, the probability of that is zero.

　　Before speculating on various scenarios, let's talk about current market conditions. As we approach next week's FOMC meeting, the calmness of the market has surprised me. Recall ahead of the July 29 Fed meeting, core CPI had been flat for weeks, yet the market was still pricing in a 10 basis point hike. But now, as indicated by the orange curve in the image above, despite “overheated” CPI data, the market is only pricing in a 4 basis point hike, which is almost identical to not expecting a rate hike at all.

　　There has been a fundamental shift in market psychology compared to a few months ago. Perhaps the unanimous rate hike in September has, at least temporarily, eased various concerns about the Fed’s credibility. This shift means the cost of keeping rates unchanged is currently very low. By contrast, at the July 29 meeting, pausing the hike directly triggered a bond market turmoil that lasted until the US Treasury’s unexpected announcement on August 19, then Waller signaled a shift at Jackson Hole on August 28, finally calming the bond market turbulence.

　　Now let’s speculate on some specific scenarios.

　　

jumps from the current $110 to $125. On the surface, a sharp rise in oil prices seems likely to prompt a Fed rate hike, but I disagree. Surging oil prices would sharply worsen the French debt crisis and further intensify market fears about AI and data center-related debts. The

　　As the saying goes, don't stir up trouble. The current market sentiment is generally calm, and we should go along with that judgment: there won’t be a rate hike on October 28. There will be more meetings like July 29 where things are chaotic and the Fed faces fierce deliberations, but it won’t be next week.

Editor: Guo Jian