The Fed is about to raise rates into an energy shock. Markets think it's the last hike for a while.

A strong October jobs report has all but settled the case for a second rate rise. The bigger question is whether December ends the cycle, and the Fed won't say.

American employers added 165,000 jobs in October, the Labor Department said on 6 November. Unemployment held at 4.1% and average hourly earnings were 3.1% higher than a year earlier. For a Federal Reserve that has already started raising rates, that is not a reason to stop.

The report landed nine days after the Fed held its target range at 3.75% to 4.00%, where it has sat since a quarter-point rise in September. Prediction markets now treat a second rise at the 8-9 December meeting as the base case. The more consequential question is what comes after December, and on that the Fed is saying nothing.

An inflation problem the Fed did not create

Consumer prices rose 3.7% in the year to September, and 0.6% in the month alone. Energy did much of the damage: fuel and power prices were up 20.4% on the year. Strip out food and energy and inflation was 2.6%.

That is the awkward part of the case for tighter money. A central bank cannot pump oil, and a good share of the headline number comes from an energy shock tied to the war with Iran. Economists' worry is that it is no longer only energy, as higher costs seep into everything else. The Fed's own statement in October was blunt: "Inflation remains elevated." Chair Kevin Warsh has declined to offer any guidance on what comes next.

The October vote showed where the pressure on the committee is coming from. It was 10-2 to hold, and both dissenters, Governor Lisa Cook and Cleveland Fed President Beth Hammack, wanted a quarter-point rise. It was Cook's first dissent since she joined the board in 2022. Before that meeting, futures markets gave a rise less than a one-in-ten chance, according to CME's FedWatch tool.

Traders have already priced the next move

On Polymarket, traders put the chance of a quarter-point rise in December at 77.5% (as of 6 November), up 5 points in a week, on $4.9mn of trading. A hold sits at 20.5%. Together the two account for 98% of the probability: neither a cut nor a half-point rise is seriously in play.

Linked markets tell the same story. A market on whether the Fed raises rates again this year stands at 77%, and markets counting this year's rises put 74.5% on two, September's and December's, against 24.5% on one.

Markets see one more rise, then a stop

The most telling market looks further ahead. A contract on the Fed's decisions from October to January puts 71% on "pause, hike, pause": one more rise in December, then a hold in January. Set against the 77.5% for a December rise, that leaves only about 6 points for a further rise in January. The market is thin, but the shape is clear: one more rise, then a stop that traders do not yet doubt.

That is where prediction markets and the rest of Wall Street part company. Rate futures leave room for one or two more increases in 2027. Polymarket's contracts do not yet reach that far, but on the decisions they do cover, they price December as the last move for now. Warsh has declined to say which reading is right.

Nor are traders braced for damage. They put the chance of a US recession by the end of 2026 at 4.5%, down 2 points on the week. A central bank tightening into an energy shock usually frets about demand. Markets show almost no such fear, which fits a jobs report this strong.

Why the hawks could still be wrong

There are three ways the December price could miss. The first is the data. October's consumer price index is due on 10 November, and a soft reading would test a committee that moved only after inflation picked up. Core inflation at 2.6% is the number a dove would point to.

The second is energy itself. If the war's grip on fuel prices loosens, headline inflation falls without any help from the Fed. The third is the committee. Two of its 12 voters wanted to raise rates in October; ten did not. A hold in December needs only a few of the ten to stay put.

The politics are less clear than they look. December will be the Fed's first meeting after the 3 November midterm elections, and a rate rise soon after a vote draws fire whichever party holds the White House. What the Fed has said, in its own words, is that it "will deliver price stability."

What it means for markets, business and politics

• Borrowing costs: a December rise would lift the target range to 4.00-4.25%, and a pause after it would mean rates stay there well into 2027. Mortgages, car loans and corporate credit stay expensive for longer.
• Stocks and sectors: the most rate-sensitive corners of the market, such as housebuilders, commercial property and unprofitable growth companies, have the most to lose from rates that stay high. Banks can earn more on loans while rates are elevated, and energy producers are the beneficiaries of the price shock driving inflation.
• Business: companies refinancing debt next year face higher interest bills, while energy-intensive industries absorb both costlier fuel and costlier money. Pricing power will separate the winners from the losers.
• Geopolitics: the Fed's path now runs partly through the Gulf. A de-escalation with Iran that pulls fuel prices down would weaken the case for further rises faster than any data release; an escalation would strengthen it.
• Politics: a first post-election decision to tighten will test how Warsh's Fed handles pressure from Washington. A clear signal that December is the last move would ease that pressure; refusing to give one keeps it alive.

The dates that will settle it

The 10 November inflation report is the next hurdle. After that comes the 8-9 December meeting, which brings fresh economic projections: the first official look at how many rises the committee itself expects. A rise paired with projections of no further increases would confirm what markets price. A median showing more would pull the 2027 path into the Fed's own forecasts.

Watch the December contract too. A fall below 64.5%, its low of the past week, would mean traders think the October data is not enough.

The Fed went into October with almost no one expecting it to move. Five weeks on, almost everyone expects one more rise, and no one is willing to say it will be the last.