The Federal Reserve is expected to hold rates steady this week, and markets doubt the pause will last

The Federal Reserve meets on Tuesday and Wednesday, and its officials have spent two weeks telling markets what to expect. The policy rate stays where it is, in the 3.75 to 4.00 percent range. Rate futures put the chance of a hold at 90 percent, as of October 23.

The pause is not happening because the numbers turned friendly. Reports due this week, starting the day after the decision, are expected to show inflation picking up last month and spreading beyond fuel prices, with economic growth accelerating on consumer spending and on business investment driven by demand for artificial intelligence. The September reading of the price index the Fed watches is projected at 3.6 percent, up from 3.4 percent in August, lifted by gasoline and also by airfares, rents and computers. The labour market gives the Fed no reason to hurry in the other direction either. Unemployment was 4.2 percent last month, and weekly jobless claims are running lower than at any point in Chairman Kevin Warsh's lifetime.

Analysts say a second straight increase would have been likely this week if bond markets had not already done part of the job. Treasury yields jumped after the September rate increase, with the 10 year yield reaching near quarter century highs, and that tightening alarmed officials including New York Fed President John Williams and Vice Chair Philip Jefferson, who signalled the central bank could afford to wait for more data. "The data, in my opinion, do support a rate hike," said Kathy Bostjancic, chief economist at Nationwide, pointing to a strong economy, a strong consumer and inflation that went the wrong way.

Warsh also has a political problem to manage. The meeting ends six days before the November 3 elections that decide control of Congress, and affordability sits at the centre of the campaign. Gregory Daco, chief economist at EY Parthenon, said Warsh will have to dispel any impression that the decision was political, while also keeping alive the expectation of another increase, because a Fed that sounds finished with inflation would lose credibility and could send yields spiking harder than a rate increase would.

The decision may not be unanimous. Scott Anderson, chief US economist at BMO, said the October call is closer than markets are pricing and expects at least one dissent, from Cleveland Fed President Beth Hammack, possibly joined by others. Anderson now expects two more rate increases before the Fed is done, with inflation still running well above the 2 percent target it has missed for more than five years.