The Federal Reserve is widely expected to hold its policy rate at 4% at the next FOMC meeting, with markets pricing roughly an 80% chance of no change and only about a 16% chance of a hike. Hot CPI and producer-price reports keep another increase in play, while the current base case points to a possible hike in December.
The setup echoes 2018, when the Fed raised rates in September, paused at its November meeting and delivered another increase in December. The comparison is not a precise forecast, but it highlights how quickly rate expectations can change when Treasury yields move.
Why it matters
The 2-year Treasury yield is a key variable in the outlook. It recently reached 4.9% and stood near 4.76%, above the 4% federal funds rate. When the 2-year yield fell back toward the policy rate in late 2018, financial conditions became restrictive without the Fed delivering all of the increases projected in its economic forecasts.
That history challenges the market's current assumption that two additional hikes will follow in 2027. The Federal Reserve itself projected two more increases in 2019 at the end of 2018, but it did not raise rates at all that year and began cutting by the middle of 2019.
Market impact
A December hike would take the federal funds rate to roughly 4.25%. If the 2-year yield falls at the same time, policy could become restrictive without a long sequence of additional increases. That would be a less aggressive outcome than current rate projections imply, but it would still keep pressure on interest-sensitive businesses and risk assets.
Investors will be watching the October FOMC decision, the path of the 2-year yield into and after the midterm elections, and whether weakness at the long end of the Treasury market creates a broader growth scare. The central question is whether inflation forces another hike or falling yields do part of the Fed's tightening work for it.
Frequently asked questions
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What are markets expecting at the next FOMC meeting?
Markets are pricing roughly an 80% chance that the Federal Reserve holds its policy rate at 4%. The implied chance of a hike is about 16%.
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Why is a December rate hike still considered possible?
Hot CPI and producer-price reports are keeping inflation concerns alive. A December increase would take the federal funds rate to roughly 4.25%.
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Why does the 2-year Treasury yield matter for Fed policy?
The 2-year yield is above the current policy rate and can reflect expected monetary conditions. If it falls toward the federal funds rate, financial conditions may tighten without as many Fed hikes.
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How does the current setup compare with 2018?
In 2018, the Fed raised rates in September, paused in November and hiked again in December. It later projected two 2019 increases but delivered none and began cutting by midyear.
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What could reduce the need for additional Fed hikes in 2027?
A decline in the 2-year yield after the midterm elections could make policy more restrictive relative to market conditions. That could weaken the case for the additional hikes currently projected.
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