Federal Reserve pause bets rise for October after softer U.S. inflation data

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Fed pause bets rise after inflation data

Highlights

The Personal Consumption Expenditures Price Index rose 3.4% year-on-year in August, unchanged from July and below expectations for 3.7%.
Futures contracts indicate roughly a one-in-three chance of an October rate hike, down after New York Fed President John Williams cited 'no urgency' for another increase.
Despite unchanged inflation, the share of PCE price components rising faster than 3% annually remains high at 51%, supporting market expectations for potential tightening by year-end.

August inflation data shifts rate outlook

As reported by Reuters, citing the Bureau of Economic Analysis, the Personal Consumption Expenditures Price Index rises 3.4% in the 12 months through August, unchanged from a downwardly revised 3.4% in July and below economists' expectations for a 3.7% increase.

The reading eases immediate pressure on the U.S. central bank ahead of its October 27-28 meeting. Still, inflation remains above the Fed's 2% goal, and analysts say that keeps the door open to another rate increase before year-end.

Sal Guatieri, a senior economist at BMO, says the share of PCE price components rising faster than 3% annually eases to 51% from 54%, but remains far above normal levels. He says that offers little evidence of a meaningful improvement in the underlying inflation trend and is likely to reinforce the Fed's view that further policy tightening is needed.

Markets and politics frame the next decision

Traders are already scaling back bets on an October move after New York Fed President John Williams says he sees "no urgency" to follow September's rate increase with another one next month. At the same time, he still says another hike by the end of the year will likely be needed.

Futures contracts on Wednesday price roughly a one-in-three chance of an October rate hike, while continuing to point to a move by December. The Fed is still set to receive more key reports before the October meeting, including a monthly jobs report due Friday and fresh data on September consumer inflation.

The policy debate is unfolding just weeks before the November 3 national elections, when Republicans are defending slim majorities in Congress. Rising prices, partly driven by higher gasoline costs linked to the conflict in the Middle East, are also weighing on voter sentiment.

In our earlier coverage of August U.S. PCE inflation, we noted that headline and core readings came in below forecasts, easing pressure from rising Treasury yields and reducing market-implied odds of an October Fed rate hike. We also highlighted that firmer private payrolls data kept uncertainty alive about whether additional tightening could still arrive later in the year.

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