NextFin News - The Federal Reserve is "modestly hawkish" and on track to raise interest rates again at its December meeting, according to Joseph Brusuelas, principal and chief economist at RSM US — a call that is rapidly becoming the Street's base case after the central bank's October pause drew two dissents from officials who wanted to tighten anyway.
The Fed held its policy rate steady in a range between 3.75% and 4% at its October 28 meeting, the final decision before the November 3 midterm elections. But the pause was anything but dovish in outcome: the vote was 10-2, with Governor Lisa Cook and Cleveland Fed President Beth Hammack dissenting in favor of a quarter-point hike. Brusuelas argues the Fed stopped only because of the electoral calendar, not because inflation had cooled, and that the December 9 meeting will resume the tightening that September began.
The Setup: A Pause That Was Not a Pivot
Brusuelas' call rests on a sequencing argument: the Fed tightened into a strong economy in September, sat out October for political reasons, and will resume once the election risk has passed. Ahead of the October meeting, he wrote that "if not for the midterm elections on Nov. 3, we would have expected another rate increase of 25 or even 50 basis points." The December path has since sharpened: rising oil pricing pressures "will push inflation higher and support a rate hike in December," he said, and an intensification of the Middle East conflict after the elections "could prompt the Fed to raise its rate by 50 basis points in December."
The market is converging on the same view. Prediction-market pricing as of October 28 put a 25-basis-point increase at the December 9 FOMC meeting at 76%, with a 21% chance of no change and roughly 3% odds of a half-point move. Christopher Hodge, chief US economist at Natixis, put it more bluntly in reaction to the October decision:
"Inflation remains a problem, growth remains solid, and the unemployment rate is stable – and a hike in December is now likely a foregone conclusion."Kay Haigh of Goldman Sachs Asset Management agreed:
"We expect the Fed to resume rate hikes in December. September's strong CPI print is a reminder that upside inflation risks remain."
The inflation backdrop explains the pressure. The personal consumption expenditures price index — the Fed's preferred gauge — ran at 3.4% year over year in August, unchanged from a downwardly revised July and below the 3.7% consensus. The September print, due October 29, is expected to rebound to 3.6%. The Cleveland Fed's nowcast model, updated October 7, put September headline PCE at 3.56% and core PCE at 3.02%, with October running even hotter at 3.69% headline and 3.10% core.
The October market reaction told the same story as the vote. Treasury yields rose across the curve: the two-year yield, most sensitive to Fed policy, climbed 3.9 basis points to 4.776%, the 10-year gained 5 basis points to 5.047%, and the 30-year added 3.8 basis points to 5.338%. Stocks were mixed, with the Nasdaq Composite down 0.2% and the S&P 500 up 0.1%, while the dollar index was flat.
Why the Pause Does Not Mean the Fight Is Over
The first-order read of the October hold is dovish: the Fed stopped tightening. The second-order read is the opposite. The September statement had already stripped out its easing bias, and Chair Kevin Warsh framed the quarter-point move as the start of a discipline rather than a one-off.
"In the meeting just concluded, the FOMC decided to raise the target range for the federal funds rate by ¼ percentage point to 3¾ to 4 percent, in support of the Federal Reserve's dual mandate,"Warsh told reporters on September 16.
Minutes from the September 15–16 meeting show all participants supported the hike, emphasizing that "inflation remained elevated while the labor market appeared to be near full employment, with some signs of strengthening." That combination — hot prices and a firming labor market — is precisely the condition under which central banks keep tightening. The October pause, then, was not a response to cooling inflation; it was a response to the electoral calendar.
This is where the "modestly hawkish" framing does its work. Modest, because the Fed is moving one meeting at a time rather than committing to a campaign. Hawkish, because the direction of travel has not changed. The transmission mechanism runs through expectations: every meeting the Fed holds while inflation runs above target, real interest rates fall and financial conditions ease. The two October dissents matter even though they lost — they signal that the committee's center of gravity is still shifting toward restraint, and that the next move is more likely to be up than down.
Cyclical Flare or Structural Regime Change
The entire December-hike debate turns on one question: is this inflation a cyclical flare that will revert, or a structural regime change that will not? Brusuelas has answered it explicitly.
"We've undergone a structural transformation of the economy,"he said in September.
"The regime change in inflation and interest rates is the outcome."
His evidence is historical rather than episodic. During the entire inflation-targeting era, from January 1996 through August 2026, PCE inflation has been at or below 2% in only half of 369 months. In 16% of those months, it ran above 3%. "With inflation now at 3.4% and expected to hit 3.6% in September, this is an anomaly that needs to be addressed," he wrote.
That is a structural argument, and it clears a high bar: it points to a permanent shift in the inflation process — AI-driven capital expenditure, fiscal deficits, deglobalization, energy shocks — rather than a temporary supply disturbance. A cyclical claim would require repeated mean-reversion episodes; a structural claim requires evidence that the old regime no longer applies. Brusuelas is making the latter, and the political economy reinforces it: with 73% of voters saying their cost of living is heading in the wrong direction, a central bank cannot afford to declare victory early.
The counter-evidence is real, however. The Fed's own Summary of Economic Projections does not expect inflation to return to the 2% target until 2028, and the median dot plot has implied a cut next year — a path that assumes disinflation resumes without a prolonged tightening campaign. RSM's own analysis of the September projections noted "there is not a consensus on moving the policy rate down to 3%," the Fed's estimate of the terminal rate, and flagged three dissents within the FOMC.
So the market is caught between two regimes. The structural camp, led by Brusuelas, sees a decade of above-target inflation as the new normal. The cyclical camp, anchored in the Fed's own projections, sees a bumpy but eventual return to 2%. The December meeting is the first real test of which camp is right.
The Second-Order Risk the Market Has Not Priced
Here is the second-order implication most investors are missing. Prediction markets price a 76% chance of a 25-basis-point December hike — a single move. What they do not price is the path dependency of that move. If the Fed hikes in December and inflation keeps running above 3.5%, the next question is not whether to tighten further, but how fast. Brusuelas has already floated a 50-basis-point December hike under an escalated Middle East scenario. The market assigns that roughly 3% odds.
That gap matters because rate expectations move asset prices through two channels: the level of rates and the volatility of the path. A central bank that hikes one meeting and pauses the next is far cheaper for bond markets than one that hikes in sequence. If December proves to be the first of several, the term premium — the extra yield investors demand for holding long-duration risk — will reprice even if the terminal rate does not change much. Long-term rates have already spiked on the combined strain of funding the AI buildout and rising government debt, with the Treasury overloading the front end of the yield curve through bill auctions. A sequential-hike Fed would add monetary restraint to that fiscal premium.
The asymmetry is stark. If the Fed hikes in December and then stops, markets absorb it. If it hikes and signals more to come, the repricing hits equities, credit spreads, and the dollar simultaneously. That is the tail risk embedded in Brusuelas' call — and it is not in the 76% headline number.
The Strongest Case Against the Hike
The bear case for Brusuelas' call is not that inflation is tame. It is that the Fed has already done enough, and that more tightening risks breaking something the committee does not want to break. The September hike took the funds rate to 3¾–4%, and real rates are now positive after years of negative territory. Households are already feeling the cumulative effect: Brusuelas himself noted that "many households find it a challenge to purchase food for their family, gasoline for their autos or refill their fuel oil tanks as winter approaches."
More importantly, the Fed's own forecast does not support a sustained campaign. The median participant has projected a rate cut next year. The terminal-rate estimate sits at 3%. If the committee truly believed inflation was structurally embedded, the dot plot would show a higher-for-longer path, not a descent toward neutral. Sonu Varghese of Carson Group captured the market's read after the August PCE print:
"The economy is running hot, policy remains easy, and the Fed's challenge is figuring out how much restraint is needed."Note the framing — how much, not whether. That is a cyclical worldview.
There is also the credibility problem. Warsh has made clear he dislikes forward guidance. A Fed that hikes in September, pauses in October with the election days away, and hikes again in December invites the accusation that it is reacting to headlines rather than data. Hodge at Natixis anticipated exactly this:
"The primary question will likely be the rationale for the pause after worse than expected inflation data in the inter-meeting period. Warsh will likely deflect and reiterate the line that this Fed looks at trends and is not beholden to specific point data."
The falsifying signal is specific and near. September's PCE print, due October 29, carries a consensus of 3.6% year over year. If the actual figure comes in at or below 3.3%, with core PCE holding at 3.0% or lower, the structural-reacceleration thesis loses its trigger and the December-hike probability should fall sharply. Conversely, a print at 3.7% or above would validate the hawkish camp and push the market past a single 25-basis-point move.
What Comes Next
The December 9 meeting will be decided by the data that arrives between now and then. The base case is a 25-basis-point hike, consistent with both Brusuelas' call and the 76% market probability. The upside case is a 50-basis-point move, contingent on an escalation of Middle East tensions and a hot inflation print. The downside case is a hold, which would require either a benign inflation surprise or a sharp deterioration in labor-market data.
For investors, the asymmetry runs through duration. A one-and-done December hike leaves the yield curve largely intact. A sequential-hike Fed reprices the term premium across the curve, hitting long-duration assets hardest — growth equities, long-dated Treasuries, and credit spreads that have tightened on the assumption that the tightening cycle is nearly over. The exposed are the portfolios that priced the Fed's own dot plot; the beneficiaries are the money-market and front-end positions that gain from a higher-for-longer path.
Short term, watch the incoming inflation and labor data and any Fed speakers between now and December. Medium term, watch whether the dot plot at the December meeting still implies a 2027 cut — if it does not, the structural camp has won the argument inside the committee. Long term, the question is whether the regime change Brusuelas describes — inflation and interest rates structurally higher than the 2010s — proves durable. If it does, the December hike is not the story. It is the first line of a new one.
The Fed's pause in October was a calendar decision, not a conviction. December will reveal which one the committee actually holds.
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