The Fed will release its latest decision on interest rates and is expected to once again leave rates unchanged at a 22-year high, while possibly raising them again as early as December if economic growth remains resilient.

Interest rate determination

Fed Chairman Jerome Powell has said that toward the end of the rate hike campaign, Fed officials prefer to wait first to assess the impact of past rate hikes on the economy. With inflation still well above the committee's 2 percent goal and economic growth near a two-year high, policymakers want to keep the option of raising rates again open. No disagreement is expected on this point.

Thomas Simons, senior economist at Jefferies LLC, said:

"It would be a hawkish pause. The economy is doing well and inflation is not yet at target. They more or less have to continue to say we may need another rate hike."

Bloomberg economists Anna Wong, Stuart Paul, Eliza Winger and Estelle Ou said the Fed would hold rates steady at the Oct. 31-Nov. 1 FOMC meeting, the second straight pause. However, we expect the policy statement and Powell's comments to leave the door open for further rate hikes. Whether the extended pause turns into a definitive end to the rate hike cycle will depend on labor and inflation data in the coming months.

The recent spike in Treasury yields has led to tighter financial conditions, which some Fed officials have said could reduce the need for a rate hike at this meeting. Deutsche Bank, for example, estimates that the recent spike in yields could be equivalent to as many as three Fed rate hikes (25 basis points each). That has led more hawkish FOMC members, including Dallas Fed President Stephen Logan and Fed Governor Robert Waller, to say they will be patient when it comes to moving on rates.

FOMC statement

The committee may adjust its language describing the near-term economy to reflect last quarter's 4.9 percent growth rate and continued solid job gains. The FOMC is also likely to acknowledge the recent tightening of financial conditions, which Fed officials have highlighted in recent speeches. No change in guidance is expected.

"In general, the preference is for as few changes as possible," said Ellen Meade, a former senior adviser to the Fed's Board of Governors and a research professor at Duke University. "It is likely that the first paragraph will be amended to acknowledge the strength of the new data, including on the labor market, inflation and GDP growth."

Powell stressed that geopolitical tensions have increased in the wake of the outbreak of the Israel-Hamas war, and the FOMC may discuss whether to list this as a risk in the statement.

Market reaction

The market reaction to the FOMC is likely to be muted: the decision was highly anticipated and investors have been focused on the US fiscal deficit, so the refinancing announcement is likely to overshadow the Fed meeting.

"Almost the biggest event on Wednesday was the Treasury funding plan," Simons said.

Powell press conference

Powell will be asked by reporters whether he agrees with the committee's September forecast, when it expected another rate hike before the end of the year. He is likely to say that future rate hikes depend on new data and that monetary policy works with a lag, so the economy has yet to feel the full impact of higher rates.

Vincent Reinhart, chief economist at Dreyfuss & Mellon, who worked at the Fed for more than two decades, said Powell will "leave the option of another quarter-point hike on the table, but it will be cavalier." He expects more credit tightening to hit the banking system, but he knows it will take time. He thinks there will be more pressure to come and just be patient.

Powell will likely be asked to explain why the recent pickup in economic growth and above-target inflation have not prompted a rate hike. His press conference is likely to echo themes from a speech at the Economic Club of New York on Oct. 19, in which he said whether to raise rates would depend on the data, the outlook and the balance of risks.

"Powell has to hold the line from two weeks ago," Meade said. "Their priority is to get inflation back to 2 percent, and they're not giving up." They may have to raise rates, but they may have already done it and tend to keep open the possibility of another hike so that market participants don't misinterpret it."