Fed to hit pause on rate hikes, but maybe not for long

Key Points:

• Federal Reserve policymakers are expected to hold US short-term borrowing costs steady this week, but investors anticipate the pause in rate hikes will be brief due to persistent inflation concerns and strong economic growth.
• Recent data show inflation increased last month beyond fuel prices, with robust consumer spending and business investment, particularly driven by AI demand, while the labor market remains stable with low unemployment.
• The Fed's decision to pause is influenced by a sharp rise in US Treasury yields, which raised concerns about overly tightening financial conditions, leading key officials to prefer waiting for more data before further action.
• Fed Chair Kevin Warsh faces the challenge of maintaining the Fed’s credibility in fighting inflation without appearing politically influenced ahead of the November 3 election, while signaling the possibility of future rate hikes.
• Economists expect a close call at the Fed meeting, with some dissenters favoring more hikes; inflation data projected to show a rise to 3.6% in September supports the case for further tightening to reach the Fed’s 2% inflation target.