Market participants have sharply increased the probability that the Federal Reserve will keep its benchmark interest rate unchanged at its upcoming October meeting, even as inflation remains stubbornly high and economic data continues to surprise to the upside.
According to CME FedWatch, futures now imply an 85.1% chance of a pause, up from roughly 72% a day earlier and a near coin-flip about a month ago. The rapid repricing reflects a growing belief that policymakers will hold off on further tightening while they assess the cumulative impact of their recent moves.
Warsh avoids committing
Fed Chair Kevin Warsh, speaking at the IMF-World Bank annual meetings in Bangkok, declined to offer any forward guidance on the central bank's next steps. "I don't prejudge meetings," he said, reiterating his longstanding preference to avoid telegraphing policy decisions. He did, however, reaffirm the Fed's commitment to bringing inflation back to target, describing last month's rate increase as part of a broader tightening cycle.
His comments leave the October decision wide open, with officials continuing to weigh incoming data against the risk of overtightening.
Inflation and data complicate the picture
The latest inflation readings have done little to ease concerns. Wednesday's consumer price index showed headline inflation at 3.7% year-over-year, while core inflation came in at 2.6%—both slightly above consensus. The producer price index added to the worry, with wholesale prices rising 1.3% in September and 6.3% from a year earlier, the largest annual gain since December 2022.
Retail sales also beat expectations, advancing 0.8% against a forecast of 0.3%. That resilience in consumer spending, combined with elevated producer prices, suggests price pressures may be more entrenched than hoped.
Despite these figures, the market has moved decisively toward expecting a pause in October. The shift suggests investors believe the Fed will want more time to see how the economy responds to the tightening already delivered.
December hike still on the table
While an October increase now looks unlikely, traders still see a high probability of a move at the December meeting. CME FedWatch data shows an 88.9% chance of a 25-basis-point hike on December 9, up from 83% a week earlier.
UBS Global Wealth Management has also updated its outlook, projecting a quarter-point increase in December followed by another 25-basis-point hike in March 2027. In a research note led by economist Andrew Dubinsky, the bank expects the Fed to pause after that March move to evaluate the full impact of higher rates.
The combination of persistent inflation, strong consumer spending, and a labor market that remains tight keeps the door open for further tightening, even as the immediate October decision appears likely to be a hold.
This article is for informational purposes only and does not constitute financial advice.
