Fed Hike Odds Plunge from 70% to 20% as Market Shifts Expectations

The Federal Reserve faced a market that was pricing in a high chance of another interest-rate hike in October at the start of this week. By Friday, those odds had plummeted to just 20%. CME FedWatch data showed a roughly 70% probability of a 25-basis-point increase at the Fed's October 27-28 meeting on Monday, September 28. However, by Thursday, that probability had fallen to around 25%, and after Friday's jobs report, it dropped to around 20%. The move was not driven by one economic release but rather a series of developments that shifted markets from pricing an October hike as the base case to treating it as increasingly unlikely.

New York Fed President John Williams provided the first major catalyst when he said, “With the policy action we took at our September meeting, there is no need for urgency, and we have time to gather more information.” He left the door open to one additional increase later in the year if the economy evolved broadly in line with his forecast. Markets took that as a signal that October was less likely and that policymakers could wait for more evidence.

The probability of an October increase fell to roughly 50% from nearly 70% earlier that day, while the two-year Treasury yield declined. Goldman Sachs also moved its own forecast for the next Fed increase from October to December after the inflation report, according to a research note by Chief Economist Jan Hatzius.

Fed Vice Chair Philip Jefferson delivered a speech at the University of Virginia on Thursday, saying 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 added that yields had risen since the September meeting as investors reassessed the macroeconomic outlook and said, “My colleagues and I will need to come to our own judgment, which may take more time.”