Capital.com Senior Market Analyst, Daniela Hathorn, looks ahead to next week’s FOMC meeting and Fed interest rate decision
Hathorn says: “Last week’s holiday-shortened U.S. trading schedule did little to calm financial markets, as shifting expectations around Federal Reserve policy continued to dominate sentiment. With minimal fresh macroeconomic data, investors remained laser-focused on commentary from Fed officials and movements in rate expectations.
“The CME FedWatch tool shows markets pricing in an 87% probability of a 25 bps rate cut at next week’s FOMC meeting. That sharp rise from just weeks prior—when expectations briefly dipped as low as 20%—has been a central driver of momentum in equities and bond yields. The repricing largely reflects two forces: dovish Fed commentary over recent weeks, despite the lack of major economic releases, and a softening in longer-term expectations following renewed speculation about who will chair the Federal Reserve next year. Odds have strengthened that Kevin Hassett—considered pro-growth and one of the most dovish potential candidates—could be Trump’s pick, with markets assigning roughly a 75% probability to his appointment. The combination of these near-term policy expectations and the prospect of a more dovish Fed leadership has reinforced the belief that U.S. interest rates could trend lower into 2026 and beyond.
“Much of the discussion centers on the difficulty of steering inflation from the current 3% range down to the Fed’s 2% target. The sharp decline from the 2022 peak near 9% was the easy part; what remains is the “hard mile” of disinflation. Forward-looking indicators, including ISM’s services sector prices paid index, continue to show persistent price pressures, creating a tension between market expectations and actual inflation dynamics. This disconnect suggests that volatility may remain elevated until clearer data emerges. This week, the delayed September PCE report is expected to show core inflation around 2.9%. Anything with a “3” handle could challenge the market’s aggressive rate-cut pricing.“
