Fed Hike Odds Plunge to 20% After Series of Market Shifts

The probability of another interest-rate hike in October by the Federal Reserve dropped significantly in just one week, from around 70% to below 20%. The sharp decline came after a series of developments that shifted market expectations. On Monday, September 28, markets were pricing about a 70% chance of an October hike, with Treasury yields rising and investors positioning for further tightening.

The first catalyst was a speech by New York Fed President John Williams on Tuesday, who said 'there is no need for urgency' in raising rates again. While he left the door open to another increase later in the year, markets took this as a signal that October was less likely. The probability of an October hike fell to around 50% after his comments.

The next leg came from inflation data, which showed August PCE inflation increasing by 0.3% month on month and 3.4% year over year, below expectations. This further reduced the likelihood of an October increase, with market pricing moving into the roughly 35%-40% range. Goldman Sachs also moved its forecast for the next Fed increase from October to December.

On Thursday, Fed Vice Chair Philip Jefferson echoed Williams' sentiments in a speech at the University of Virginia, saying that 'any future adjustments in policy should be determined by carefully examining trends in the data.' By this point, markets were pricing only about a 25% chance of an October hike. The final test came with Friday's payrolls report, which delivered a sharp downside surprise, adding just 29,000 jobs in September.