Investors Slash October Fed Rate Hike Bets After Mixed Economic Data

Investors have significantly scaled back their expectations for a Federal Reserve interest rate hike in late October, following a week of key economic developments. As recently as the end of last week, financial markets priced in an 80% chance of a 0.25 percentage point rate increase to a range of 4.00%-4.25% at the October 28 meeting. By Friday, however, that probability had dropped to around 20%.

The shift in sentiment was driven by three major events. First, the core personal consumption expenditures (PCE) price index, a key inflation gauge, eased to 3.0% in August from 3.3% in July. While this was a positive surprise, inflation remains well above the Fed's 2.0% target.

New York Fed President John Williams reinforced expectations of one more rate hike this year during a Wednesday speech, though he suggested inflation could then ease toward the target in 2027. His remarks aligned with the Fed's September projections, which called for one additional hike in 2023 and no changes in 2027. Williams, who has a permanent vote on rate decisions, carries significant weight in Fed leadership.

On Friday, a weaker-than-expected September jobs report further dampened expectations of an October rate hike. The U.S. economy added just 29,000 nonfarm jobs, far below the anticipated 90,000. August's job growth was also revised down to 133,000 from 162,000. The unemployment rate rose to 4.2% from 4.1%, while annual wage growth slowed slightly.

Economists interpreted the data as a sign that the labor market is cooling. Vanguard senior economist Adam Schickling told CNBC the report 'strengthens the case for the Federal Reserve to remain patient.' Seema Shah, chief strategist at Principal Asset Management, told Bloomberg News that the weaker hiring, softer wage growth, and higher unemployment all point to a labor market that is cooling rather than reaccelerating.

As of Friday, financial markets still fully priced in a rate hike by December, with expectations of two to three more increases in 2027, bringing the terminal rate to 4.74%.