Fed Debates December Hikes Based on Data That Doesn't Exist Yet

The Federal Reserve finds itself in a peculiar bind. Officials are preparing to make one of their most significant monetary policy decisions in months based on economic numbers they have not yet seen. Markets are pricing in a 70 percent probability of a December rate hike. The Fed's own dot plot shows 16 of 19 committee members expect at least one more increase before year's end. Meanwhile, American consumers are already living in the inflation the central bank is trying to contain.

The cruel irony sits at the intersection of two timelines. The Fed's October 27-28 policy meeting arrives before the September consumer price index data—the very statistic that many economists believe will determine whether another 25 basis point increase happens in December. The central bank is essentially preparing to telegraph its December move while operating in the dark about the inflation print that should guide it.

Fed Governor Christopher Waller has shifted his public stance on rate policy, a rhetorical repositioning that markets have absorbed as a sign that the hiking cycle may not be finished. Current inflation by the Fed's preferred measure stood at 3.4 percent in August, nearly double the institution's 2 percent target. The September forecast sits at 3.7 percent—still elevated, still sticky, still the kind of number that makes central bankers uncomfortable about declaring victory.

This is what persisting inflation looks like from the policy side. Bond markets are already positioned for the moves they expect. Traders are hedging against the probability that rates stay higher for longer. The Federal Reserve's current federal funds rate target range of 3.75 to 4 percent represents the result of a September 25 basis point increase, yet the conversation has already shifted to whether that was enough or merely a pause.

Philip Jefferson, the Fed's Vice Chair, and John Williams, president of the New York Federal Reserve, have both suggested publicly that they would prefer additional data before committing to further action. This is economist-speak for caution. It is also entirely rational. Yet the machinery of market expectations has largely moved past the "let's wait and see" position. JPMorgan's chief U.S. economist Michael Feroli expects another hike at the December meeting "on the assumption that the September and October price reports show still-sticky trends in core inflation." The assumption does heavy lifting in that sentence.

Consumers, meanwhile, have not waited for official inflation statistics to form their opinions. Consumer inflation concerns persist despite the Fed's recent rate cuts—or perhaps because of them. A household paying $6.50 for a pound of butter and $8 for a box of cereal does not need a CPI report to understand that their purchasing power has diminished. They are living the inflation. The Fed is debating it based on forecasts and assumptions about data they will receive after they signal their December intentions.

The consensus view among economists is for a "hawkish hold" in October, where the Fed keeps rates unchanged but leaves abundant room for December movement. This is the central bank equivalent of keeping all options open while actually leaving very few. It is a way of managing expectations without quite committing to anything. The one-in-four chance markets are pricing for an October hike reflects genuine uncertainty about whether waiting is acceptable when inflation remains this far above target.

What makes this moment particularly uncomfortable for the Fed is the collision between its data-dependent framework and the market's forward-looking nature. Officials will gather in late October to discuss economic conditions through early October. Markets will interpret every word as a prediction about December. The September CPI data will arrive just before their meeting, giving them the most recent inflation picture. Yet the trajectory matters more than the snapshot. Is inflation still trending downward? Or has it stabilized at an uncomfortably elevated level?

The Fed faces genuine pressure on both sides. Higher for longer monetary policy could slow economic growth heading into 2027. But premature rate cuts could allow inflation to re-accelerate, requiring an even more painful tightening cycle later. Neither option is appealing. Both require accepting some risk.

In the meantime, the institution that claims to be data-dependent is preparing to make December decisions based on September assumptions. This is not necessarily wrong. It may even be prudent. But it is also a reminder that central banking involves as much art and judgment as economics and mathematics. The data arrives when it arrives. Policy decisions must be made on assumptions about what it will say. The Fed is not debating rate hikes based on what has happened. It is debating them based on what officials fear might happen next.