Fed Watch – 10/23/2026

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Well, the Fed meets next week. What are the odds saying. I’m Lauren Saidel-Baker and this is ITR Economics Fed Watch for October 23rd.

We do have a meeting coming up. Very likely to be a boring one from the headline rate change. overwhelmingly the market does not expect a change in interest rate. So, with a hold being our base case, what are we looking for in this meeting and what general macroeconomic trends are going to determine the path of rates going forward. Well, overall we still are on pace for a hike in December. Again, those are overwhelming odds across the market. And in fact, at this point there’s actually a slightly higher likelihood of the Fed moving 50 basis points in December rather than not moving at all. So, the general consensus is rates going higher. This is something that we at ITR have been saying for quite some time now. I don’t think this year is going to be the end of the rate hiking cycle. We will almost certainly see further increases into 2027.

So where does that leave us today as we sit here in October waiting for this next meeting? Well, I want to point out a few key things. First of all, the timing of the midterm elections, that really doesn’t matter to next week’s rate decision. A quick reminder, we say this every once in a while, but it’s good to repeat it. The Federal Reserve, this is not a political body, certainly not a partisan organization. So, while the output, the things that they do will have implications in the political sphere, I want to be very clear they shouldn’t be making any of these moves for a political direction, one side of the aisle or the other. So, what we’re seeing really with the timing of next week’s meeting versus the midterm elections, I don’t think they’re holding just because the midterms are coming up. Really, this is feeding into more of what we have heard from some Fed officials about taking a more measured pace of rate increases, about doing kind of this this gradual movement. Now, some market observers are saying that the Fed is getting a little bit behind the eight ball. I don’t want to take a strong position there. I will say, however, that the Fed does tend to lag behind some of these economic needs more than they lead the way. That’s very typical in past cycles if you look at exactly the path that rates took. However, as we go into a, a broader view, especially what the bond market is telling us, I do want to note that Treasury yields, those have come down from those very high levels that we saw in early October. So, they’re still quite elevated. And especially if we look at something like the 10-year Treasury, this is still high. That means that real borrowing costs for consumers those are still high, mortgage rates go essentially hand in hand with that 10-year Treasury. The actual cost of borrowing for our government that is elevated today. And with rates going up, not down, some of these pressures are really going to persist for consumers.

So how bad do consumers have it? Well, it’s a tale of two cities. We’ve talked so much about the k-shaped economy. The consumer is generally holding in, but it’s very different in the upper income bracket versus lower income earners. So, we’re seeing a lot of strength, especially in those groups who are really benefiting from things like the tech spillover, the AI build out. That’s another key driver of inflation. And I wanted to turn to the inflation picture. Really, the thing that the Federal Reserve is trying to keep in check with these rate hikes. It’s not just oil prices. I know that’s one of the big drivers of recent pricing pressures, but even within the energy sector, oil prices are just one small segment of that. We’ve also seen more consistent and quite considerable energy price rise just from the electricity cost, as all of these data centers coming online are demanding so much power, so much electricity and driving costs up across the board. We’re seeing that more generally with this tech build out. There are deep pockets funding these data center builds and that is contributing to, both competition for things like labor materials and components, and that’s driving up prices across the board, even for groups that are not related to data center building, they are seeing those cost pressures simply from the demand pull of the build out happening here. We also still have higher shelter costs. As we talk about the construction segment. Houses are expensive, mortgage rates are high and very likely rising from here. Shelter costs are the biggest single component of the consumer price index. So that is adding another affordability constraint to those would be home buyers. And then we just see the boring stuff right. We’ve talked a little bit about the commodity price cycle that is more general than just oil prices and energy costs. We also see things like elevated fiscal spending, the M2, the money supply, more money in circulation does tend to be inflationary. These factors are so broad, so diverse, and so wide reaching that there’s not going to be a magic bullet to cure inflation quickly.

So that’s why we at ITR, we do not expect, even with these rate hikes for inflation to go back down to that Fed’s 2% target. I think we will see some disinflation next year, but a pickup in the cycle not quite reaching 2%. That’s important, and all of these uneven economic drivers that’s bringing additional risks and additional uncertainty for the Federal Reserve. So how they start to address that in next week’s meeting and beyond, we’ll be watching quite closely. We hope you’ll watch it right here with us on ITR Economics Fed Watch.