October FOMC Preview: Expect the Policy Rate Will Move Higher, Just Not This Month

We expect the Fed to hold the policy rate at 3.75-4.0% in October while signaling that further tightening remains likely. Persistent inflation argues for additional hikes, but the risk of overtightening favors a gradual approach. We forecast two more 25bp hikes in December and March, to a terminal range of 4.25-4.5%, with risks skewed toward more tightening. We expect two dissents, from Presidents Logan and Hammack. With markets pricing only an 8-10% probability of an October hike, a hawkish surprise could push Treasury yields lower and flatten the curve as growth concerns intensify, while the USD should remain supported by persistent US inflation and rate differentials.