The Federal Reserve opens its October meeting with a hold expected and December in doubt

The Federal Reserve opens its two day October meeting on Tuesday with the decision already priced in and the argument pointed at December.

Markets expect the committee to hold the target rate at 3.75 to 4.00 percent when it announces on Wednesday. Futures pricing put the chance of a hold at about 90 percent on Friday, and prediction markets read the same way on Tuesday, as of October 27. The pause follows a quarter point increase on September 16, the first hike in more than three years, passed unanimously. Minutes from that meeting, released on October 7, said most officials thought one more increase this year would likely be appropriate. The calendar leaves one meeting to do it, on December 8 and 9.

Several economists told Reuters the case for hiking this week was real and the committee still held back. "The data, in my opinion, do support a rate hike," said Kathy Bostjancic, chief economist at Nationwide, pointing at a strong economy, a strong consumer and labor market, and inflation that, in her words, deteriorated and went the wrong way. She said policymakers were spooked by the run up in Treasury yields after the September hike, which threatened to slow the economy harder than the committee intended, and that New York Fed President John Williams and Vice Chair Philip Jefferson were among the officials who signaled they are content to wait for more data. The 10 year yield touched a 24 year high of 5.35 percent on October 8 before easing back.

The data arriving right after this decision will test the pause. Government reports due this week are expected to show inflation picking up last month and broadening beyond fuel prices, and growth accelerating last quarter on consumer spending and business investment driven by demand for AI. The labor market sends two signals at once: the unemployment rate stood at 4.2 percent last month and weekly jobless claims run lower than at any point in Chairman Kevin Warsh's lifetime, while September payroll growth slowed to 29,000 jobs. Warsh has declined to preview the decision and kept the committee's focus on inflation, which he has called too high for too long.

Households feel the September hike already in credit card rates, home equity lines and adjustable rate mortgages, which rose soon after it landed. Mark Zandi, chief economist at Moody's Analytics, expects the next increase in December and ties it to the war. "With the Iran war escalating and oil prices rising, inflation will likely remain elevated," he told the Detroit Free Press. Morgan Stanley's chief economist, Michael Gapen, told CNBC that a hold this week does not put the Fed out of the water and that the economy can handle 75 to 100 basis points of total hikes. The meeting also sits one week before the November 3 midterms. Analysts surveyed by Bloomberg pointed at that timing as one more reason a second straight hike was unlikely. Wednesday's statement, and the words Warsh chooses after it, will tell borrowers whether December is a plan or only a warning.