Fed Likely to Pause Rate Hikes in October Amid Mixed Economic Data

The US Federal Reserve is widely expected to keep interest rates unchanged at its October FOMC meeting, with the likelihood of a hike dropping to around 18%. This shift comes amid weaker-than-expected jobs data and lingering inflation concerns. As of now, markets are pricing in an 80% chance of a pause this month, while December still holds a 69% probability of a rate hike.

Recent job market data has raised red flags, with the US economy adding just 29,000 jobs in September 2026, a significant drop from earlier months. The unemployment rate ticked up to 4.2%, and total employment figures saw revisions that suggest a softer labor market. Chris Osmond, Chief Investment Officer for Fifth Third Wealth Advisors, noted the labor market's weakening, but emphasized that inflation remains a persistent challenge for the Fed.

Despite the pause in rate hikes, inflation remains the Fed's primary concern. The PCE price index rose 0.3% in August 2026, while the core PCE index, the Fed's preferred measure, increased 0.2%. Meanwhile, economic growth data remains firm, with Q2 GDP revised up to 2.2% and manufacturing PMI readings indicating robust sector growth.

However, the Fed's decision could still pivot if upcoming data, particularly the September CPI report due on October 14, shows unexpected inflation stickiness. Chicago Federal Reserve President Austan Goolsbee has hinted that a rate hike is not entirely off the table, stressing the need for evidence to achieve the 2% inflation target. Michael Feroli of J.P. Morgan anticipates at least one more hike this year but does not foresee further increases in 2027.