Robin J Brooks expects the Federal Reserve to hold rates at its Oct. 28 decision, arguing that no realistic scenario would prompt a hike before the U.S. midterms.
In an Oct. 22 Substack post, Brooks said markets were pricing four basis points of a hike, despite a consumer-price report he called “arguably hot.” He said the unanimous September rate increase may have quieted concerns about the Fed’s credibility, helping explain the restrained market pricing.
That pricing compares with 10 basis points ahead of the July 29 meeting, after a flat core consumer price index reading several weeks earlier. Brooks said the difference has made a pause easier for the Fed to manage. He recalled that holding rates in July sparked a bond-market tantrum that ended after a surprise Treasury buyback announcement on Aug. 19 and a hawkish pivot from Warsh at Jackson Hole on Aug. 28.
Brooks outlined two oil-price scenarios. If Brent crude rose to $125 from about $110, he said, concerns about France’s debt and borrowing for artificial intelligence and data centers could deepen. He argued that a falling S&P 500 and tighter financial conditions in that scenario would leave little reason for the Fed to raise rates.
A surprise peace deal with Iran would point in the other direction, in Brooks’ analysis. He said Brent could fall to $85, with further declines possible, while long-term yields dropped and stocks rallied. That combination could ease financial conditions enough for the Fed to consider a hike to counter the easing, he wrote.
Brooks called such a deal before the Nov. 3 midterms a zero-probability event, saying the United States would have to accept Iran’s terms. The Fed’s rate decision is scheduled for Wednesday, Oct. 28.
