October FOMC Recap: The Fed Holds at 3.75%–4.00%, but a 25bps December Hike Is Still in Play

Energy is doing the heavy lifting, but core has stopped helping. Consumer prices rose 0.6% month-on-month (MoM) in September, the most since April, with petrol (gasoline) alone accounting for more than half of the increase. More importantly, core CPI, which strips out volatile food and energy prices, rose 0.3% MoM for a second month, lifting the annual rate to 2.6% from 2.4%. In September we warned that the improvement in core was fading. It has now stopped.

The pressure is spreading through the supply chain. Producer prices (what businesses charge each other) jumped 1.3% MoM in September. That brought the annual rate to 6.3%, its highest since December 2022. Within that, transport and warehousing costs rose 3.4% MoM. Meanwhile, attacks on shipping around the Strait of Hormuz have pushed Brent up about 20% over the past month, after a dip in late September. Diesel costs are now flowing into freight, and freight costs tend to flow into everything else.

There was one piece of good news, but it came with an asterisk. The Fed's preferred gauge, core Personal Consumption Expenditures (PCE) inflation, came in at 3.0% year-on-year (YoY) in August, below the expected 3.3%. However, that was largely due to an annual data revision, and August was flat against the revised July figure. In short, inflation is lower than we thought, but it is not falling.

Consumers have noticed, and that is precisely what worries the Fed. Petrol averaged about USD 4.27 per gallon on 27 October, more than a dollar above a year ago. Year-ahead inflation expectations rose to 4.7% in October from 4.6%, according to the University of Michigan. If households expect prices to keep rising, they push for higher pay and businesses raise prices sooner, so inflation keeps itself going even after oil stops climbing, and it takes harder action to bring down later. The Fed cannot lower oil prices. Higher interest rates are its main tool against that risk.

Why wait? Jobs and timing

The labour market gave the Fed a reason for patience. Payrolls rose just 29,000 in September, and the two prior months were revised down by a combined 60,000. Unemployment ticked up to 4.2% from 4.1% in August, while average hourly earnings grew 3.0% YoY. While one softer print does not make a trend, the downward revisions mean this is no longer the strengthening labour market that gave the Fed cover in September.

Timing mattered, too. September's hike is only six weeks old, and rate changes take months to reach borrowing and spending. December, with fresh projections due and the 3 November midterm elections behind it, offers a cleaner window to act.

Press Conference Highlights – the medicine is working, but not finished

Chair Kevin Warsh framed the hold as a pause to "take stock of where we are". He said, "what we've done in this monetary medicine is starting to work some", but with "no firm conclusions" yet.

He still does not see policy as tight. In September, he was "hard-pressed to describe broad financial conditions as restrictive". This time, he said he was "unwilling and unable to call financial conditions tight". A Fed that does not consider itself tight at 4% is a Fed that has room to go further.

As usual, he gave no hint on December's decision.

The bigger announcement was about the calendar. From 2027, one of the Fed's eight annual meetings will be devoted to long-term strategy, with no rate decision, rising to two in 2028. That leaves seven rate-setting meetings next year and six the year after. For investors, fewer chances to adjust rates means each decision carries more weight and could introduce additional market volatility around each one, which is another reason to add longer-maturity bonds in stages, not all at once.

Market Reaction

Bonds barely moved, because the message was already priced in. The 2-year Treasury yield, which tracks expectations for Fed policy most closely, slipped about 2bps to 4.72%. The 10-year was roughly flat at around 5%, while the 30-year edged up about 2bps to 5.35%.

Equities shrugged it off. The S&P 500 rose 0.34% on the day, as the hold had been fully priced in. Gold edged slightly lower, while Brent crude held firm at around USD 115/bbl, a reminder that the pressure behind inflation has not eased.

What comes next: a December hike remains our base case

We expect a 25bps hike at the 8-9 December meeting, taking the FFR to 4.00%–4.25%. That matches the Fed's September projections and market pricing of around 80% (Bloomberg data, 28 October). The October jobs and CPI reports due before then are more likely to strengthen the case than weaken it. The main risk is a sustained fall in energy prices. We think that is unlikely before December, because even a deal would ease fuel costs only slowly, and core inflation is now rising too.

In short, this was a pause in the hiking cycle, not the end of it.

How to position your portfolio while the Fed waits

A pause is not a reason to change course. Over the next 6 to 12 months, the risks the Fed is watching still point towards higher rates, so we keep our equity positioning and make one adjustment in bonds (see Table 2 below).

Bonds: keep most holdings short-maturity, and start adding longer maturities slowly. Our call to keep duration (a bond’s sensitivity to interest rate moves) short still holds for most of the portfolio, but with the 10-year Treasury yield at about 5%, we now also add some longer-maturity bonds. A higher starting yield gives investors more income to absorb further rises in yields. But with a December hike likely, yields could keep rising, so we would build the position in stages.

A barbell lets you do both. Keep most holdings in bonds maturing within two years, and move 5–10% of the allocation into 7–10-year government bonds over three to four quarters. The 2-year still yields around 4.78%, close to 5.04% on the 10-year, and maturing short bonds fund each new tranche. We stop at 10 years: the 30-year pays only about 0.3 percentage points more for far greater price risk.

For the long leg, the iShares USD Treasury Bond 7-10yr UCITS ETF (LSE: IDTM), a low-cost fund holding 7–10-year US Treasuries, is our preferred vehicle. The actively managed PIMCO Income Fund Admin Cl Inc SGD-H suits investors who prefer to delegate, though it also carries corporate credit risk.

Equities: favour profits that are already on the table. When borrowing costs stay high, earnings that may only arrive years from now are worth less today. That favours businesses that are cheap and profitable now.

Asia offers more of that combination than the US. Asia ex-Japan equities trade at lower valuations compared to the historical average despite a robust earnings outlook. Chipmakers remain our highest-conviction idea, as leaders such as Samsung and SK Hynix pair strong balance sheets with demand locked in by multi-year contracts. The Global X Asia Semiconductor ETF (HKEX: 3119), an exchange-traded fund (ETF) holding the region's chipmakers, is our preferred way in.

China and Singapore play different roles. China gives two complementary routes into AI. The GF CSI All-Share Information Technology ETF (SZSE: 159939) holds mainland-listed chipmakers and electronics makers, where AI demand is already visible in earnings. The Hong Kong-listed iShares Hang Seng TECH ETF (HKEX: 3067) leans towards internet platforms such as Tencent, Alibaba and Meituan, which are building AI into their services, alongside Xiaomi and BYD. One owns the hardware behind AI; the other, the platforms using it. Singapore is about income: dividends put cash in your hands now, when every future dollar is worth less.

In the US, we stay underweight overall, but we make room for two exceptions. The first is profitable internet giants: their valuations have slipped below historical averages while earnings held up, so less of their price rests on distant profits. The Invesco NASDAQ Internet ETF (NASDAQ: PNQI), which holds large US internet companies, is one way in. The second, newly added, is chipmakers, which are already earning from AI demand rather than waiting for it. The VanEck Semiconductor ETF (NASDAQ: SMH), which holds 25 large US-listed chip companies such as Nvidia, TSMC and Broadcom, is our preferred vehicle.

What would change our view? A durable reopening of Gulf shipping routes would help, but it would lower fuel costs only gradually, because shipping, insurance and refining capacity take months to recover. A sustained fall in oil and fuel prices, together with softer core inflation, would reduce the need for further hikes, and longer-dated bonds would then outperform. Asian equities also carry risks, from geopolitics to swings in chip demand.

Table 2: Recommended Products

Disclosure: This research report was prepared with the assistance of artificial intelligence (AI) tools. iFAST Financial Pte Ltd does not rely exclusively on AI for content generation; the content of this report – including all investment theses, ratings, price targets and conclusions – has been independently reviewed and verified by the research analyst(s) to ensure accuracy and professional integrity. For specific disclosure, at the time of publication of this report, IFPL (via its connected and associated entities) and the analyst who produced this report hold a NIL position in the abovementioned securities.