Fed Holds at 3.75%-4.00% With Two Dissents for a Hike. ECB Holds and Signals December Increase

Since the Federal Reserve raised rates in September for the first time in three years, the question has been whether it would keep going. On Wednesday, Oct. 28, it paused. On Thursday, Oct. 29, the European Central Bank paused too. Both are leaning toward another move in December.

The Fed holds, with two votes to hike

The Federal Open Market Committee kept the federal funds rate at 3.75% to 4.00%. The statement said economic activity is expanding at a strong pace, spending has been resilient, productivity growth is strong, capital investment is robust, and "inflation remains elevated."

Governor Lisa Cook and Cleveland Fed President Beth Hammack dissented. Both wanted a quarter-point increase now.

The Fed's preferred inflation gauge, the personal consumption expenditures price index, ran at 3.4% in August, unchanged from July. It was 3.8% in May. The September reading was due Thursday. Economists told Reuters the data showed inflation accelerating and broadening out last month, which they said strengthened the case for a December hike. The Fed has been above its 2% target since March 2021.

The CME FedWatch tool puts the odds of a December hike at roughly 88%. Several Fed officials have signaled they expect one. New York Fed President John Williams has said he is penciling in one more hike this year and none next year. Governor Christopher Waller said in an Oct. 8 speech that more hikes are coming but that "the hikes do not need to come at consecutive meetings."

Growth is strong, but jobs data is soft

The Commerce Department reported Thursday that the U.S. economy grew at its fastest pace in a year in the third quarter. Consumers kept spending and businesses kept investing in AI, despite higher oil prices tied to the conflict in the Middle East.

The jobs picture is weaker. The economy added 29,000 jobs in September against a consensus forecast of 90,000, and unemployment edged up to 4.2%. That is the main argument for patience.

The IMF backed the Fed's approach on Thursday. Spokesperson Julie Kozack said the Fed is "appropriately remaining data dependent" and should "remain focused on price stability and act as needed to bring inflation down." She said U.S. output per hour has grown 2.5% a year, but that the gains are not as widely shared, particularly in the technology sector and associated with very strong equity markets.

Bessent says look past it

Treasury Secretary Scott Bessent argued in a CNBC interview Wednesday that the Fed should keep an open mind. "I think they should have an open mind in terms of the transitory nature of the supply shock," he said. His point is that the inflation run-up comes mostly from energy costs, which could prove temporary.

Cook and Hammack voted the other way. Higher gasoline prices drove inflation earlier this year, and in recent months the pressure has spread to a broader range of prices. That is the pattern that raises concern inflation is becoming entrenched.

Warsh cuts the number of rate-setting meetings

Chair Kevin Warsh also announced a change to the calendar. The Fed currently holds eight rate-setting meetings a year. Starting next fall, there will be seven next year and six the year after. The remaining meetings become strategy sessions with no rate decision.

Warsh said the goal is more time for "strategic deliberations, for thinking anew about big questions, looking out over longer time horizons." The Fed will not issue a post-meeting statement after a strategy meeting. Warsh expects strategy meetings to expand to twice a year in 2028. The Fed can still call an emergency rate meeting if needed.

The ECB holds

In Frankfurt, the ECB left interest rates unchanged in a move markets had expected. President Christine Lagarde hinted at a December hike, warning that high and rising energy costs were fueling inflation risks.

Three ECB policymakers told Reuters after the meeting that a hike on Dec. 17, taking the deposit rate to 2.75%, was all but certain unless energy prices suddenly collapse. They said they expect a pause afterward. An ECB spokesperson declined to comment.

The pause reasoning rests on ECB estimates circulated before the meeting. They show the recent rise in bond yields cutting cumulative economic growth by 100 basis points and inflation by 90 basis points over 2027-28, compared with the September baseline projection.

What comes next

Futures markets are betting heavily on a quarter-point Fed hike in December, with another priced for March. Tuesday's midterm elections come first. The ECB's expected hike is set for Dec. 17.

The open question on both sides of the Atlantic is the same one Bessent raised: whether an energy shock is fading or spreading into everything else. The next inflation report, the next jobs report, and oil prices will help answer it before either bank moves.