The US Dollar And Gold Face Different Risks After The Fed’s October Hold

The US Dollar faces a divided rate outlook as BofA delays two Fed increases, while other banks see tighter financial conditions limiting further hikes.

Bank of America has shifted its forecast for the Federal Reserve’s two remaining interest-rate increases to December 2026 and March 2027, after policymakers paused rather than following September’s rise with another.

The change leaves BofA expecting more tightening than Goldman Sachs and Citi, whose central forecasts envisage just one further increase in December.

The Fed held its target range at 3.75-4.00% on Wednesday in a 10-2 vote, with Lisa Cook and Beth Hammack preferring a quarter-point rise.

BofA has changed the pace, rather than the eventual level, of its forecast.

US economist Aditya Bhave writes: “Our terminal rate forecast remains at 4.25-4.5%. We think policy rates will stay at that level through end-2027. This tweak to the Fed path has no material impact on our macro forecasts.”

Thursday’s data leave room for disagreement over how much restraint the economy needs.

US GDP grew at a 3.4% annualised rate in the third quarter, accelerating from 2.2%, with investment and consumer spending contributing to the expansion.

But September’s income and spending figures showed real consumption rising less than 0.1%, while core PCE inflation increased 0.3% month-on-month.

That combination gives the Fed evidence of a strong quarter without establishing that household demand was still accelerating as it ended.

The bank assessments following Wednesday’s decision preceded those releases.

How much work have markets already done?

Goldman regards Chair Kevin Warsh’s assessment of tighter financial conditions as consistent with its own index and with a limited number of rate increases.

Higher borrowing costs and less accommodating credit and equity markets can restrain spending without an increase at every Fed meeting.

Its one-final-increase view, outlined before October’s inflation figures, survives the latest decision, although March remains a risk.

Goldman economist David Mericle writes: “We continue to expect a second and final hike in December, which would leave the funds rate at 4-4.25%. A third hike in March is also possible if inflation comes in higher than we expect.”

The second increase refers to the cycle that began in September, rather than two additional moves.

BofA questions how much of the market tightening can safely be credited to action already taken.

“We struggle with this reasoning because the Fed’s impact on financial conditions is about not only what it has already delivered, but also what markets are pricing for the policy path.”

Its economists warn:

“If the Fed is willing to lean on tighter financial conditions (but still not “tight,” per Warsh’s own admission) to hike less, financial conditions will either ease again or tighten in a perverse manner, as the market questions the Fed’s credibility. Both outcomes would ultimately put more pressure on the Fed to hike.”

Crédit Agricole also expects increases in December and March, followed by a pause, having heard little in the meeting to change its call.

A December increase is still conditional

Citi is less convinced that US economic strength is broadening and sees further market deterioration as a reason to stop sooner.

“Our base case is for a 25bp rate hike in December, but the risk is for another hold if either activity data soften or if equity prices decline and credit spreads widen further.”

UniCredit expects December tightening followed by steady rates next year, with chief economist Marco Valli explaining: “Our baseline continues to be for rates to remain unchanged throughout 2027, reflecting our expectation that underlying inflation will gradually moderate as the energy shock subsides.”

However, the bank sees rising energy costs and supply bottlenecks associated with AI investment increasing the risk of more tightening.

Even BofA allows that the March increase may become unnecessary as strong earlier inflation readings drop out of the annual comparison.

Bhave writes: “But there is also a scenario in which y/y core PCE inflation rolls off significantly due to favorable base effects early next year. In this case, the Fed might stop after just one more hike in Dec ’26, and its caution would be vindicated.”

What This Means for the US Dollar and Gold

For the US Dollar, the distinction is between a pause that delays tightening and one that brings the cycle closer to its end.

BofA’s FX team sees a slower initial response potentially requiring rates to stay higher for longer, supporting the currency eventually but allowing a bumpy adjustment first.

Gold would face a less favourable rates backdrop if persistent inflation forces further increases and keeps real yields elevated. A December-only outcome would offer more relief if lower rate expectations pulled real yields down.