The Fed Is Suddenly on Hold. When Could It Start Hiking Interest Rates Again?

The Federal Open Market Committee (FOMC), the Federal Reserve's monetary policy committee, met last week and opted to maintain the target range for the federal funds rate at 3.75% to 4%. That is, it didn't raise or lower the rate this month after hiking it a quarter percentage point in September.

After that September hike, many economists and Fed watchers expected a series of further hikes to combat elevated inflation, which remained at 3.7% year over year in September, well above the Fed's 2% target rate and an acceleration from 3.4% in August.

In its statement from the October meeting, the committee said that while inflation remains elevated, it wants to gather more information before taking further action. It also mentioned elevated uncertainty due to geopolitical events, which almost certainly refers to the war in the Persian Gulf and its impact on oil prices.

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A December rate hike looks increasingly likely

When might the Fed resume its rate hikes?

I firmly believe it will be at the last FOMC meeting of this year, on Dec. 8-9. Fed Chair Kevin Warsh and most of the rest of the FOMC seem to want to raise interest rates gradually to avoid disrupting the labor market, economic growth, and financial markets.

Futures markets seem to agree with me. They currently assign a 76% chance of a quarter-point hike at that meeting. And they put the odds of at least one more rate hike next year at 76.5%, with a decent chance -- about 43% -- of two or more hikes in 2027.

So, while the Fed is on hold this month, it looks like a "hawkish hold," as it is definitely leaning toward a rate hike as its next move rather than a rate cut. The two committee members who dissented from the majority and called for a rate hike in October point to a committee bent on raising rates to mitigate inflation.

That's important for financial markets, as is the pace of future Fed hikes.

Research by Charles Schwab (NYSE: SCHW) and others shows that when the Fed goes slow on rate hikes, the stock market performs much better than when it hurries its rate-hiking schedule. According to Schwab, "history suggests slower Fed tightening tends to support stronger market returns and firmer economic growth, while faster hikes typically deepen drawdowns."

I've been watching and listening closely to Warsh since he took the helm of the central bank back in May of this year, and he looks like a gradualist to me. That's a very good thing for investors.

Charles Schwab is an advertising partner of Motley Fool Money. Matthew Benjamin has no position in any of the stocks mentioned. The Motley Fool recommends Charles Schwab and recommends the following options: short September 2026 $95 calls on Charles Schwab. The Motley Fool has a disclosure policy.