Federal Reserve and European Central Bank Expected to Pause Together, But Why Are Global Funds Still Cautious? Former JPMorgan Analyst Predicts: Ongoing Rate Hike Pressure Still Suppresses Stocks and Bonds

According to Zhitong Finance APP, this week can be described as a “Super Central Bank Week”—the US, Japan, and European central banks will consecutively hold monetary policy meetings. The most closely watched Federal Open Market Committee (FOMC) will announce its rate decision and monetary policy statement this Wednesday local time. The latest research report from JPMorgan reveals that the core trading clues in financial markets related to this week’s monetary policy decisions by the US, European, and Japanese central banks are: after the central banks announce, as market consensus expects, a pause in rate hikes in October, how strong their hawkish stance remains, and when they might shift to an easing path.

The Federal Reserve will announce its decision at 4:00 a.m. Beijing time on October 29, with the European Central Bank following later that evening. JPMorgan’s two Asia-Pacific research notes published on October 26 indicate that both central banks will remain on hold this week. However, the Fed still needs to clarify how a pause is compatible with their anti-inflation commitment, while the ECB might continue raising rates in December and into March next year. The main investment theme summarized by JPMorgan strategists is that the short-term rate markets will focus on how expectations for further rate hikes evolve. European sovereign debt, which is critical to Europe’s financial markets, will be closely watching the ECB’s language concerning fiscal risks and the central bank’s intervention threshold. Stock markets will continue to focus on the resilience of earnings and cash flow growth under high funding costs and its impact on valuations.

JPMorgan states that while the Fed and ECB may pause rate hikes together this time, hawkish pressure remains. The Fed needs to explain how the pause aligns with market expectations for rate hikes, and JPMorgan strategists are pricing in additional ECB rate hikes in December and March next year.

Fed Chair Powell Faces ‘Pause Exam’: Markets Want More Than Just the Result—They Want to Know the Logic for December and Beyond

JPMorgan expects the Fed to keep the federal funds target range at 3.75%–4.00%. Cleveland Fed President Mester and Dallas Fed President Logan may cast dissenting votes for rate hikes; Kashkari might join but is not the baseline scenario.

JPMorgan notes that expectations for a pause mainly stem from recent dovish signals by officials like Williams, Jefferson, Bowman, and Waller—suggesting that there’s no rush for more monetary action and no need for consecutive rate hikes across meetings. JPMorgan speculates that some FOMC members might have been surprised by the market’s hawkish take on the September decision and aren’t convinced that a sustained, comprehensive tightening cycle is required. The main justification for this pause is to further observe the transmission effects of the last hike amid weak nonfarm payrolls, surging energy-driven inflation, and the still-resilient US economy.

The key issue Powell needs to address is why the Fed raised rates at the September FOMC meeting when core PCE—the Fed’s preferred inflation gauge—rose month-over-month by 0.2%, yet might pause now when the expected reading is 0.3%.

JPMorgan expects the statement’s assessment of economic conditions will not change significantly but the language will: Last time, the policy action was seen as supporting a “more timely” return to the inflation target. This time, with no new hike, they may pledge a “timely restoration of price stability,” adding phrases like “prepared to act” or “will act if necessary.” These formulations would indicate the committee still maintains a tightening bias and help preserve pricing for a December hike; it’s worth noting, however, that JPMorgan strategists in this report did not list a December Fed hike as a certainty.

Powell’s communication challenge lies in balancing “not pre-announcing every meeting’s outcome” with “explaining the policy reaction function.” JPMorgan points out that expressing a tightening bias is itself a form of forward guidance—one also used by Greenspan, whom Powell admires. As the midterm elections approach, pausing without explanation easily leads markets to speculate on policy motives.

Thus, according to JPMorgan, the trading focus will be on how the statement, dissent votes, and press conference skew compared to market expectations: if future hike expectations rise, this will likely push up short-term yields and drive down related interest rate futures prices—higher hike expectations could send short-dated Treasury yields and implied rates on fed funds futures higher (with the corresponding futures prices falling). If expectations drop, the reverse will occur. Long-term bonds and tech stocks must also digest inflation, term premia, and earnings changes. In particular, new financing costs for AI firms depend on the relevant maturity benchmark rate and credit spreads. The valuation support from a pause must be confirmed through these channels.

Another Wall Street giant, Goldman Sachs, with its veteran market strategists, still uses a base-case scenario of a pause in October and a return to hikes in December. The firm references a market-implied probability of about 90% (as of October 23), with around 2.7 rate hikes priced in through September 2027 (using October 23 rates as a starting point). Goldman’s strategists note that since one hike is widely priced in, real surprises will come from the strength of future tightening, the duration of high rates, and the reasons behind a pause or hike.

Strategist Cosimo Codacci-Pisanelli’s recent research attributes the recent rally in US Treasuries (bond price rises correspond to yield falling) to pressure on AI assets, heightened tail risks due to growth concerns, and long-term Treasuries again acting as a hedge against equity risk.

Goldman concludes that if a December hike is accompanied by further hawkish signals, the discount rates and funding stress for tech stocks could rise again; if the pause is driven by clear weakness in AI investment and economic growth, a rally in 10+ year Treasuries may not result in tech stock gains, as both earnings outlook and credit quality might worsen. Powell’s refusal to pre-commit to a path means markets must decide: is the Fed’s next move dominated by inflation pressure or by changes in growth and financial conditions?

ECB May Pause Rate Hikes, but Tightening Isn’t Over: Energy Inflation Persists and French Bond Intervention Threshold Remains High

JPMorgan is more direct about the ECB’s path: Pause this week, resume hikes in December 2026 and March 2027, and a final hike in June 2027 is an upside risk. The report notes that the market already prices in at least a fourth hike for this cycle—JPMorgan largely agrees and believes a fifth, final hike remains possible.

This judgment is backed by growth resilience and sticky inflation: though the preliminary October PMI declined, it still points to around 1.5% annualized growth, consistent with near-term forecasts excluding Ireland; the rate path used in the September staff projections already assumed just over three hikes, yet core inflation is expected to stay above target through the second half of 2028. Continued rises in oil and gas may widen inflation divergence further and lengthen the return to target. Rate hikes can’t increase energy supply but can restrict energy price rises from spreading to broader prices and inflation expectations. New staff projections in December (extending to 2029) will be key in reassessing the scale of tightening.

Pressure on French bonds is not enough to allow the ECB to finish tightening. JPMorgan admits that rising long-term yields and wider sovereign spreads can partially substitute for rate hikes, but their impact must be assessed across the whole eurozone. In the ECB’s Macro-Financial Conditions Index (FCI), the sovereign spread variable is GDP-weighted by country and makes up only about 15% of the index; France’s risk is thus diluted, and with German yields declining based on the latest data, the index actually fell slightly over the past two weeks.

The tightening of financial conditions since August has reduced some need for additional hikes but does not alter the call for at least two more. Growth resilience is not a permanent guarantee; if further energy price increases lack other growth drivers to offset them, economic activity will still be dampened—but the net policy effect may remain hawkish. For bond trading, German bunds benefit from safe-haven flows even as France’s sovereign risk premium rises; the euro’s direction should factor in both US-EU rate paths and French risk.

JPMorgan also believes activation of the Transmission Protection Instrument (TPI) by the ECB, after years of dormancy, is highly unlikely this week—nor is there sufficient justification to slow or end Quantitative Tightening (QT). The institution argues that resolving concerns about France’s fiscal outlook is primarily the responsibility of the government and presidential candidates, who must make credible fiscal adjustment commitments; even then, only a sharp worsening in market conditions would likely forge a Governing Council consensus to intervene.

In an environment where inflation exceeds target and some sovereign debt trajectories remain in doubt, slowing the APP and PEPP portfolio runoffs to support bonds likewise faces headwinds. Plans to create a structural bond portfolio to manage excess reserves are also unlikely to be introduced solely to offset fiscal concerns; by contrast, discussions to raise the minimum reserve ratio for banks are more likely to be postponed. Therefore, JPMorgan emphasizes that betting on a narrowing of the France-Germany spread requires either improved fiscal credibility or a change in intervention conditions. The energy price volatility tied to the Middle East situation, as well as further escalation in sovereign bond stress, are two key variables that could alter this path; the ECB will continue to assess these risks meeting by meeting.