Nomura: Fed expected to pause rate hikes in October as housing weakens and investment remains strong

Why might the Fed still pause rate hikes in October despite firm inflation?

Nomura expects the Fed to keep rates unchanged in October, raise them by another 25 basis points in December, and then hold them steady throughout 2027. Factors supporting a wait in October include officials’ recent relatively dovish remarks, credit-market pressures and the proximity of the midterm elections.
A pause in rate hikes does not mean the committee is unanimous. Nomura expects Dallas Fed President Logan and Cleveland Fed President Hammack to dissent in favor of a hike; officials including Williams, Jefferson and Waller have stressed that further tightening can be preceded by an interval for observation.
Nomura expects Chair Warsh not to provide explicit forward guidance, but to indirectly support a hike in December by emphasizing the lack of progress on inflation and that current policy is not restrictive. If he places greater weight on credit pressures and rising Treasury yields, he could dampen market expectations for further hikes in 2027.

Nomura expects the core PCE price index to rise 0.316% month on month and 3.07% year on year in September, ending three months of relatively subdued readings. Price pressures are broad, especially in semiconductor-intensive categories, indicating that AI demand is creating new price pressure.
But the starting point for inflation has been revised downward. Historical PCE data were revised down by more than Nomura expected; on that basis, the firm forecasts core PCE inflation of 3.1% year on year in the fourth quarter of 2026, below the 3.4% in the Fed’s economic projections. Its model also shows that the share of the 199 PCE components rising at least 3% year on year has declined.
A one-month rebound and a narrowing in the breadth of inflation are therefore occurring at the same time. Higher energy prices, supply-chain disruptions and price increases for AI-related components still pose upside pressures, while downward revisions to historical data and an improvement in the breadth of price increases give officials grounds to wait before acting.

Housing is an area of the economy where pressure has already emerged. Pending sales of existing homes fell 7.3% month on month in September to the lowest level on record; Nomura believes this signals that existing-home sales could fall below their recent annualized rate of around 4 million homes.
Construction and financing are also weakening at the same time: single-family building permits fell to their lowest level since April 2023, and mortgage applications for home purchases declined for seven consecutive weeks, reaching their lowest level since January 2025. High mortgage rates and affordability pressures lead Nomura to expect housing activity to remain weak in the fourth quarter.

Nomura expects US real GDP to grow at an annualized quarterly rate of 3.4% in the third quarter, above the second quarter’s 2.2% and the market consensus of 3.0%. Consumption growth slows only slightly from 3.8% to 3.6%, while nonresidential fixed investment accelerates markedly, driven by equipment investment, offsetting housing weakness.
AI investment remains a support: earnings reports from major cloud providers point to further increases in capital spending, and imports of technology-related goods from Taiwan, China, and South Korea have also risen markedly. However, the surge in imports also weighs on net exports; strong investment demand and a trade drag in GDP accounting can occur at the same time.
The acceleration in GDP also includes a positive contribution from inventory investment. Nomura expects growth in real sales, a closer measure of private domestic final demand, to ease slightly from 4.6% in the second quarter to 4.5%; this means demand remains solid, but not every growth measure is accelerating.