Fed decisions (Sep–Dec)
The sequence is still plausible because September’s hike already occurred and October now looks like a pause, but the market is probably overestimating how certain the December hike is. I would put the yes probability near coin-flip to slightly above, not as high as the current market price suggests.
Analysis
The key point is that the first leg of the sequence has already been satisfied: the Fed hiked in September. That means the market is really asking whether October will be a pause and December another hike. Recent reporting strongly favors the October pause, with several Fed officials sounding patient and the latest payroll data weakening the case for an immediate follow-up move. In other words, the middle step of the path looks increasingly likely and is probably the least controversial part of the prediction now.
The real uncertainty is December. The news flow suggests December remains a live hike meeting, but not a sure thing. Traders and some forecasters still expect another increase if inflation stays sticky and growth remains resilient, yet the willingness of the Fed to wait for more data creates meaningful downside to a second hike this year. A weaker labor market report lowers the pressure to keep tightening quickly, and that matters because a December hike requires the Fed to believe the cumulative tightening so far has not yet done enough.
Relative to the current market price, I think the yes probability is a bit lower. The market appears to be pricing a fairly clean pause in October and a decent chance of December action, but that still assumes inflation and activity data stay firm enough through the fall to justify another hike after September. If incoming CPI and labor data soften even modestly, the Fed can easily remain on hold in December instead of delivering the hike needed for this market to resolve yes.
The most important external factor is the sequence of data releases between now and the December meeting. If inflation re-accelerates or remains stubbornly elevated, the case for a December hike strengthens quickly. If inflation cools further or the labor market loses momentum, the Fed has a straightforward rationale to pause in December as well, which would make the full hike-pause-hike path fail even if October is unchanged.
Arguments
For
- Arguments for Yes: October now looks very likely to be a pause, which fits the required middle step.
- Arguments for Yes: December is still widely viewed as a live hike meeting if inflation stays sticky.
Against
- Arguments against Yes: The market may be overconfident about December, and a second pause would kill the sequence.
- Arguments against Yes: The Fed has signaled it wants more evidence, which makes a follow-up hike less certain than the market implies.
Key drivers
- September’s hike is already locked in, so the outcome depends mainly on whether October pauses and December hikes.
- Recent Fed commentary and weak payroll data make an October hike look unlikely, which supports the required pause step.
- December remains a live meeting because stubborn inflation could still force another tightening move.
- The Fed’s preference for more data before acting again creates real risk that December becomes a second pause instead of a hike.
Risk factors
- A softer inflation trend over the next two reports could remove the rationale for a December hike.
- Any further labor market cooling would make the Fed more comfortable waiting until 2027 or later to tighten again.
Scenarios
Best case
Inflation stays elevated, October is a clean pause, and December delivers another hike, producing the exact hike-pause-hike sequence.
Most likely
October pauses, and December becomes a close call that depends on the next inflation and labor reports, with the full sequence slightly more likely than not but far from secure.
Worst case
October pauses as expected but December also pauses because inflation and growth cool, causing the market to resolve no.
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