U.S. Fed rate hike odds fall after weak jobs data

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Fed rate hike odds fall

Highlights

CME's FedWatch tool shows probability of an October Federal Reserve rate hike drops to 17%, down from nearly 36% a week earlier after weak jobs data.
U.S. economy adds 29,000 jobs in September versus expectations for over 80,000 and core PCE inflation rises 3% in August versus 3.3% estimate.
Despite receding October hike odds, FedWatch and Kalshi indicate over 75% and 65% chances, respectively, for a rate increase in December.

Jobs and inflation data shift October outlook

As reported by CNBC, market pricing turns sharply after September employment figures show weaker-than-expected hiring and reinforce a softer inflation signal from earlier in the week. Investors now assign only a limited chance that the Federal Reserve raises rates again at its October meeting.

CME's FedWatch tool, which is based on trading in 30-day interest rate futures, shows a 17% probability of a quarter-point increase, down from nearly 36% a week earlier. On prediction market Kalshi, the odds of an October hike fall to 18% from almost 70% over the same period.

The U.S. economy adds 29,000 jobs in September, below estimates for an increase of more than 80,000. That softer labor market reading follows data showing the personal consumption expenditures price index, the Fed's preferred inflation gauge, comes in cooler than expected, with core prices excluding food and energy rising 3% in August against consensus expectations of 3.3%.

Adam Schickling, a senior economist at Vanguard, says the report strengthens the case for the Federal Reserve to remain patient. He says the labor market has not deteriorated sharply, but has also shown little evidence of meaningful strengthening, giving policymakers reason to wait for additional data.

December expectations remain elevated

Even as expectations for an October move recede, traders continue to price in a strong possibility of a rate increase in December. On FedWatch, the implied odds of a December hike stand above 75%, while Kalshi shows a 65% chance of another increase.

The changing market view reflects how investors think the Fed may balance its dual mandate of maximum employment and stable prices after raising rates at its September meeting. The central bank is set to announce its next interest-rate decision at the end of a two-day policy meeting on Oct. 28.

In our earlier coverage of the September U.S. jobs report, we highlighted that hiring lost momentum as payroll growth came in far below forecasts and the unemployment rate ticked higher. We also noted that seasonal adjustment effects may have exaggerated the weakness, while the softer data—alongside cooler inflation—pushed market expectations for an October Fed rate hike notably lower and kept attention on longer-term risks to the labor market.

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