Markets sharply reduced expectations for a Federal Reserve interest rate hike in October after weaker labor-market data and more dovish comments from a senior policymaker.
Traders are now almost evenly split between another rate increase and no change at the Fed’s next meeting.
Fed October Rate Hike Odds Fall
Markets are pricing in a 49.4% chance that the Federal Reserve will raise interest rates to 4.25% in October, according to CME FedWatch data.
That probability has dropped sharply from 74.6% a day earlier.
At the same time, expectations for the Fed to keep rates unchanged have increased significantly.
Markets now see a 50.6% probability of a rate hold, up from just 25.4% in the previous session.
John Williams Signals Less Urgency
The shift in Fed rate hike expectations was driven partly by comments from New York Fed President John Williams.
Williams said there was no immediate need to rush into another interest rate increase.
He also suggested that only one additional hike may be required this year to bring inflation under control.
The Fed already raised rates by 25 basis points to 4.0% earlier in September.
Williams said the need for further tightening had decreased after that move and added that upcoming economic data should provide more clarity on the outlook.
Weak Labor Data Weighs on Rate Hike Bets
Softer-than-expected U.S. labor-market data also reduced expectations for another Fed hike.
The latest JOLTS job openings report came in weaker than anticipated, raising concerns about slowing labor demand.
Employment conditions remain an important factor in Federal Reserve policy decisions alongside inflation.
Weak consumer confidence figures also raised questions about how much room the Fed has to continue tightening monetary policy without putting additional pressure on the economy.
Fed Maintains Focus on Inflation
Despite the latest shift in market expectations, the Federal Reserve maintained a relatively hawkish tone at its September meeting.
Fed Chair Kevin Warsh reiterated the central bank’s commitment to bringing inflation back toward its 2% annual target.
That means inflation data will remain a major factor in determining whether the Fed raises rates again.
U.S. PCE Inflation Data in Focus
Investors are now waiting for the August Personal Consumption Expenditures price index.
The PCE index is the Federal Reserve’s preferred inflation measure and could significantly influence expectations for future interest-rate decisions.
Core PCE inflation is expected to remain well above the Fed’s 2% target.
A stronger-than-expected reading could revive expectations for another rate hike, while softer inflation could strengthen the case for keeping rates unchanged.
Nonfarm Payrolls Could Shift Fed Expectations
Friday’s U.S. nonfarm payrolls report will also be closely watched.
The September jobs report could provide further evidence about whether the labor market is cooling or remaining resilient.
Combined with the PCE inflation data, the employment figures may determine whether markets move back toward expecting an October rate hike or continue favoring a pause.
Overall, expectations for an October Fed rate hike have fallen sharply, but upcoming inflation and employment data could still change the outlook.
