For weeks, investors and Federal Reserve watchers had been expecting the central bank to hold interest rates steady when it meets later this month. But fresh worries about inflation based on new data suggest officials aren’t coming to the October meeting with a predetermined outcome.

Futures markets expect the Fed to hold rates steady in October, assigning only a 17% probability of an increase. But many economists think that the Fed meeting on Oct. 27-28 is a much closer call. Some see a good chance the Fed will raise rates.

“I think it’s a 50-50 call,” said Ethan Harris, former chief economist at BofA Securities, in an interview. Harris thinks the Fed should hike, but believes the committee has been “dovish” and may be reluctant to hike again so quickly.

The Fed hiked rates for the first time in three years in September, shifting away from a policy of slow rate cuts in 2024 and 2025 as inflation worries eased.

Fed officials characterized the increase at the time as part of a plan of limited hikes designed more to increase momentum in the process of bringing inflation down, rather than to combat a burst of inflation.

But September’s inflation data, which came in higher than expected, changed the picture, and some economists think the Fed needs to move more quickly.

“I think October is a live meeting. We think the Fed will raise rates in October and December,” said Matthew Martin, U.S. economist at Oxford Economics, in an interview with MarketWatch.

No preview from Warsh on what the Fed might do

Fed officials won’t be speaking publicly until after the decision. In his last public comments before the Fed’s blackout period, Chairman Kevin Warsh was neutral about monetary policy, saying he didn’t like to prejudge meetings.

“I don’t believe in saying now what I might do at the meetings that we have in the balance of this year,” Warsh said on the sidelines of the IMF/World Bank annual meeting in Bangkok.

The Fed seems to be facing two distinct scenarios.

One, laid out in an interview by former Philadelphia Fed President Patrick Harker, would be for the Fed to hike rates quickly by a quarter point in October and December, and then pause to assess the inflation outlook.

The Fed wants to get interest rates up to where they are putting downward pressure on the economy. Right now, rates in the current range of 3.75% to 4% don’t seem to be accomplishing that, Harker said on CNBC.

Another benefit of swiftly raising rates would be to buffer the Fed’s credibility as inflation fighters, he added.

Carl Weinberg, chief economist at High Frequency Economics, wrote that he thinks the latest inflation data will prompt enough Fed policymakers to pivot to support the October and December option.

Martin, of Oxford Economics, said the September inflation data showed acceleration outside of energy prices, a worrying sign since goods outside of energy tend to be less volatile. Consumer prices rose 3.7% over the past 12 months, while the producer-price index showed wholesale inflation running at a 6.3% rate.

The second scenario for Fed officials would be to move more slowly in combating inflation by hiking only once every three months, with moves in December and March. This fits with the views expressed by many Fed officials who said before the latest inflation data that there was no urgency to hike.

Some economists think the Fed wants to hold rates steady in October because the central bank doesn’t want to raise interest rates six days before the midterm elections on Nov. 3 and risk looking political.

Harris thinks the midterm concern is a small factor for the Fed. “There is no way to behave around the election that won’t get criticism from somebody, and they will get pilloried by the president no matter what they do,” he said. 

Many economists said choosing between the two scenarios is a tough call for the central bank.

One benefit of a pause in October is that it will give the Fed more time to assess the data and determine how far to go, Aditya Bhave, head of U.S. economics research for BofA Global Research, wrote in a note to clients. The cost would be that the Fed risks falling behind the curve given the booming U.S. economy, he added.

Lindsey Piegza, chief economist for Stifel Financial, said an October hike would signal “an elevated level of concern” for inflation, creating an opening for the market to push rates higher and put more downward pressure on the economy. The more patient approach might make the public wonder if higher inflation is here to stay, she noted.