Fed Expected to Hold Steady at October Decision

The Week Ahead

The Fed is widely expected to hold the federal funds target steady at the October 28^th decision after their quarter percentage point hike in September. Leading up to the decision, many FOMC members signaled they believe further increases may be necessary, but are not urgent—implying a possible December hike. Several FOMC members see more pressure to raise rates and are likely to dissent in favor of a hike at this meeting. The FOMC won’t release an updated Dot Plot; the next one is scheduled for December, unless Chair Warsh can persuade the rest of the FOMC to phase it out before then.

Real GDP growth likely strengthened in the third quarter as businesses replenished inventories. Inventories spiked in the first quarter of 2025 as businesses aggressively purchased imports to front-run higher tariffs, and have been a headwind to growth since then. Real final sales to private domestic purchasers (a.k.a. core real GDP) will likely be little changed from the second quarter’s brisk pace.

PCE inflation is forecast to accelerate in September on higher gas prices, with a smaller pickup of core PCE inflation excluding food and energy. Core PCE inflation was likely around 3% year over year. Monthly personal income and outlays data will likely show spending outpaced income growth again, pushing the saving rate down to the lowest since 2022. The saving rate is on a long-run downtrend, in part because of demographics—retirees are spending down savings—and in part because capital gains are an increasingly important driver of consumer spending power and are not counted in personal income. But over shorter time horizons like the last six or 12 months, the falling saving rate points to stress on household budgets, especially those of lower-income and rural households who are harder hit by rising gas and diesel prices.

Last Week in Review

Winter came early for the housing market as rising long-term interest rates pushed construction and sales indicators to multiyear lows. Housing starts fell 5.2% in September to the second lowest since 2020; pending home sales fell 7.3% to the lowest on record (Data began in 2001); and the National Association of Home Builders Housing Market Index edged down to the lowest since 2012 in October. Freddie Mac, the Mortgage Bankers Association, and Bankrate report that average rates for 30-year fixed mortgages rose to multiyear highs around 7.5% in October. If these higher interest rates persist, housing construction and sales will likely fall again in 2027, with cash buyers and investors taking an increasing share of purchases. Real private residential investment, the component of GDP that measures both homebuilding and real estate industry activity fueled by existing sales, is hovering around late 2016 levels.