Market expectations for a Federal Reserve interest-rate increase at the October meeting have all but vanished, with pricing swinging from roughly 70% probability at the start of the week to below 20% by Friday. The dramatic repricing followed a series of economic releases and central bank commentary that collectively undermined the case for immediate tightening.
According to CME FedWatch data, traders on Monday, September 28, assigned about a 70% chance that the Federal Open Market Committee would raise its benchmark rate by 25 basis points at the October 27-28 meeting. That probability fell to around 25% by Thursday and dropped further after Friday's employment report, briefly touching 13.8% before settling above 20%.
Williams sets the tone
The first major catalyst came from New York Fed President John Williams, who said on September 29 that “with the policy action we took at our September meeting, there is no need for urgency, and we have time to gather more information.” While he did not rule out another increase later this year, his remarks signaled that policymakers could afford to wait for additional data before deciding on the next move.
Markets interpreted Williams's comments as a clear indication that an October hike was not a foregone conclusion. The probability of an October increase dropped to roughly 50% from nearly 70% within hours of his speech, and the two-year Treasury yield retreated from its highs.
Soft inflation data adds pressure
The next blow came from the Fed's preferred inflation gauge. August PCE inflation rose 0.3% month over month and 3.4% year over year, while core PCE increased 0.2% on the month and 3.0% annually. Both monthly figures came in below expectations, and revisions lowered some earlier readings.
Following the release, market-based odds for an October hike moved into the 35%-40% range. Goldman Sachs also shifted its forecast for the next Fed increase from October to December, with chief economist Jan Hatzius noting that “an October hike is unlikely” given the combination of the inflation data and Williams's comments.
Jefferson reinforces the message
Fed Vice Chair Philip Jefferson added to the dovish tone on Thursday, stating that “any future adjustments in policy should be determined by carefully examining trends in the data, the evolving outlook, and the balance of risks.” He also noted that yields had risen since the September meeting and that policymakers would need time to form their own judgment.
By Thursday, the probability of an October hike had fallen to about 25%, effectively erasing most expectations for a back-to-back increase. The market's focus shifted to whether the next move would come in December or whether another increase would be needed at all.
Payrolls deliver the final blow
Friday's employment report sealed the deal. The U.S. economy added just 29,000 jobs in September, far below the roughly 90,000 expected by economists. The unemployment rate rose to 4.2%, and average hourly earnings increased only 0.1% for the month, with a 3.0% year-over-year gain.
Revisions also painted a weaker picture: July payrolls were revised down from a 21,000 gain to a 10,000 decline, and August was revised from 162,000 to 133,000, removing a combined 60,000 jobs from prior estimates.
Jefferies chief U.S. economist Thomas Simons described the report as “the nail in the coffin for an October hike.” Treasury yields fell, with the two-year dropping to around 4.72% and the 10-year slipping toward 5.17% after the release.
The week's bond-market moves reflect a broader reassessment of the Fed's policy path, with investors now questioning whether the central bank will tighten again at all this year. The next major test will be the September CPI report, scheduled for October 14, which could further influence rate expectations.
This article is for informational purposes only and does not constitute financial advice.
