Fed Hike Odds Plummet to 20% as Market Shifts Focus to December

Markets were pricing a high probability of another interest-rate hike in October at the start of this week. However, by Friday, that expectation had almost vanished.

The Federal Reserve was facing a market that had been pricing in a significant chance of an increase on October 27-28. The CME FedWatch data showed around a 70% probability of a 25-basis-point hike on Monday, September 28. By Thursday, this number fell to roughly 25%, and after Friday's jobs report, it dropped to around 20%. The move was not driven by one economic release but rather the accumulation of several factors.

The week began with Treasury yields rising, and investors positioning for further Federal Reserve tightening. New York Fed President John Williams provided a major catalyst on Tuesday when he said that there is 'no need for urgency' and policymakers have time to gather more information before deciding on another increase. Although he left the door open to one additional increase later in the year if the economy evolves as forecasted, markets took this as a signal that October was less likely.

The probability of an October increase fell from nearly 70% earlier that day to roughly 50%. The two-year Treasury yield declined. Core PCE rose 0.2% on the month and 3.0% annually, while both monthly measures came in below expectations. Market pricing responded quickly, with estimates of the probability of an October increase moving into the roughly 35-40% range during the session.

Goldman Sachs also moved its own forecast for the next Fed increase from October to December after the inflation report. Chief economist Jan Hatzius said that 'an October hike is unlikely' and that the firm was pushing the second hike in its forecast to December.