Why the Fed Might Pause Rate Hikes in December

Markets still anticipate a December rate hike. On 4 November, Investing.com’s rate monitor showed an approximately 80% chance of a quarter-point increase. A decision to hold rates would break from this forecast, making any data that could convince the Fed to delay especially significant for traders.

In September, the Fed lifted its benchmark rate to a range of 3.75–4%, then kept it steady on 28 October. Dallas Fed President Lorie Logan backed the pause, but two days later called for at least two additional quarter-point increases. Her stance shows how policymakers may support further tightening while opting for longer gaps between moves.

The Fed used a comparable hold in June 2023, pausing to review new data and the impact of prior rate increases before hiking again in July. Now, the argument for delaying hinges on continued inflation moderation and whether slow hiring turns into more widespread job market softness.

Inflation Has Eased Unevenly

The PCE price index climbed 3.6% from September 2025 to September 2026, exceeding the Fed’s 2% yearly goal. Core inflation, which strips out food and energy, rose 0.3% in both August and September 2026.

But over the third quarter of 2026, core inflation decelerated to an annualised 2.5%, down from 3.3% in Q2. These numbers represent each quarter’s price gains as an annual pace. While they indicate improvement across the longer span, the most recent monthly data raise doubts about how lasting this trend will be.

Energy costs introduce additional uncertainty. EBC analyst Edgar Peredo points to potential disruption near the Strait of Hormuz as a possible driver of sustained inflation, since rising fuel expenses affect transport and manufacturing. However, oil declined over 8% on 4 November as investors weighed the chances for Middle East peace after the US elections.

Democrats secured majorities in both the House and Senate, taking power in January. This outcome led investors to reconsider the conflict’s prospects and future fiscal policy, though the legislative impact is still pending. Continued low oil prices would reduce inflation pressure, while a fresh supply disruption could undo that gain.

The October CPI release, scheduled for 10 November, will offer the next important price data. Multiple weak readings would build a better argument for waiting than a brief oil drop alone.

Slower Hiring Could Strengthen the Case for Waiting

September 2026 saw payroll growth of 29,000, while the total for July and August was revised lower by 60,000. The jobless rate ticked up to 4.2% from 4.1% in August, but stayed inside the tight band observed since March.

At his October press event, Fed Chair Kevin Warsh struck a more positive tone, citing low unemployment claims. The October employment data, due on 6 November, will show if September’s weak hiring persisted.

More weak job growth combined with a rising unemployment rate would raise the danger that elevated borrowing costs worsen an economic downturn. A more stable labour market would provide policymakers greater flexibility to address sustained inflation. This difference matters for December: a robust jobs market can better handle a rate hike, while the inflation trajectory decides if additional tightening is needed.

Borrowing Conditions Remain Uneven

Warsh noted that financial and credit conditions have tightened for certain households and companies since the September rate increase. He separated this recent tightening from the general state of borrowing conditions. The Fed’s October survey on lending paints a comparable mixed view: credit standards grew stricter for small-business and commercial real estate loans, but stayed largely stable for large and medium-sized business loans.

Demand for business loans softened in part because firms required less capital for investment and in part because they sourced cheaper financing elsewhere. Some companies are trimming their investment requirements, while others are switching lenders. Widespread signs of falling investment and hiring would bolster the case for giving September’s rate hike more time to take effect.

What Bond Yields Mean for the Dollar and Gold

Peredo stresses that gold’s reaction to poor jobs data also relies on bond yields, the dollar, and investor appetite. Each of these can shift for reasons unrelated to the upcoming Fed move.

Market action on 4 November offers a recent case. Gold gained 2.2% by 06:19 GMT alongside a weaker dollar and falling Treasury yields. Reuters later that day put the 10-year Treasury yield at 4.89%, roughly six basis points lower. These numbers came from different moments during the trading session, yet both accounts indicated buying interest in bonds as investors reconsidered the post-election landscape.

When expected US rates drop, the dollar tends to lose support. For gold, lower bond yields after accounting for inflation expectations make interest-bearing assets less attractive. Long-term yields also mirror views on inflation and government debt, so their movements may not match shifts in the likelihood of a December hike.

If inflation moderates together with widespread job market weakness, a pause becomes more likely. But whether that scenario boosts gold still hinges on how bond yields and the dollar react. So traders must evaluate two interconnected factors: the data guiding the Fed’s choice and the yields on offer in other parts of the financial system.