First American senior economist Sam Williamson on what the Fed will do this week, and what it may do in December
With the Nov. 3 midterm elections rapidly approaching, the Federal Reserve will provide one more major economic headline on Wednesday when it announces its latest rate decision.
Coming off the first rate hike by the central bank since 2023, and with more increases possible in the coming months, the Federal Open Market Committee will convene Tuesday and Wednesday. The current federal funds target rate is between 3.75% and 4.00%.
Inflation is still running well above the Fed's target, and Treasury yields have swung sharply in recent weeks. Last week those yields receded, bringing mortgage rates back into the lower 7s.
However, a softer-than-expected jobs report seemed to pump the brakes on an October increase. The Fed is widely expected to leave rates alone this week, and one economist says patience is the likelier path.
Sam Williamson (pictured top), senior economist at First American, said the Fed is more likely to hold off than act now.
"Election day may command the headlines, but the economic data will ultimately drive the Fed's next move," Williamson told Mortgage Professional America. "And in September, the data painted a mixed picture, with inflation coming in hotter than expected and job growth surprising to the downside. While an October rate hike remains a possibility, the Fed may prefer to proceed cautiously and wait until December."
Why a pause looks likely
The jobs numbers in September spun the betting markets from a likely rate hike to a hold. As of Monday morning, CME FedWatch showed a 90.6% chance of a hold and a 9.4% chance of a quarter-point increase, compared with a 64.2% chance of an increase on Sept. 25.
In a LinkedIn poll after the last increase, some brokers said the Fed should have gone with a 50-basis-point bump. Williamson sees merit in the more cautious option.
"Larger rate hikes may work faster, but that speed comes at a cost," he said. "Moving too aggressively could damage an otherwise stable economy, while smaller, more gradual hikes give households and businesses more time to adjust. For now, the Fed is likely to stick with its slow-and-steady approach unless core inflation starts to rise sharply."
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Inflation is still a concern for the central bank. September consumer prices rose 3.7% from a year earlier, and core inflation was 2.6%, according to the Bureau of Labor Statistics.
Odeta Kushi, vice president and deputy chief economist at First American, noted that the Fed's own projections don't show inflation reaching its 2% target until 2029.
Barry Habib, CEO of MBS Highway, pointed to a different signal at NAMB National, the National Association of Mortgage Brokers' conference in Las Vegas. Investors were demanding 4.701% on two-year Treasuries Monday morning, compared with the Fed's own benchmark target range of 3.75% to 4%.
"One of the best ways to understand what the Fed will do is to look at the 2-year Treasury yield," Habib said. "It's not to look at the odds of a Fed hike on the Fed funds futures. Everyone looks at the Fed funds futures, but that's so volatile. That 2-year Treasury yield right now is telling us that the Fed probably needs to raise another half a percent.”
What comes after the pause
A pause would leave the harder question for December. As of Monday morning, CME FedWatch measured against today's rate put the odds for December at 18.5% unchanged, 74% for 25 basis points higher and 7.5% for 50 basis points higher.
The Mortgage Bankers Association (MBA) expects an increase in December and a second in the first quarter of 2027.
Every policymaker voted for the September increase. Williamson said that may change as members evaluate incoming data.
"The Fed remains united on the goal of bringing inflation down, but not necessarily on how quickly to get there," he said. "As policymakers weigh persistent inflation against the risk of overtightening, differences over the timing and pace of further hikes could lead to more dissent in the months ahead."
In a release Oct. 13, the MBA's weekly survey put the 30-year rate at 7.5%, the highest since November 2023.
The 10-year peaked at 5.36% on Oct. 7, and Freddie Mac's 30-year average fell to 7.32% on Thursday. The pullback followed a tech stock selloff that sent investors into bonds.
Williamson warns that recent easing of Treasury yields doesn’t mean that it will be smooth sailing ahead.
"Treasury yields may have retreated from their recent highs, but the forces pushing them higher have not," Williamson said. "Stubborn inflation, resilient growth, and expectations for further Fed tightening will likely keep interest rates elevated through year-end. While oil prices and investor sentiment around AI stocks could create some bumps along the way, the broader trend heading into 2027 still points to a higher-for-longer interest-rate environment."
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