Traders trim October Fed rate hike bets after new reading on second-quarter inflation
A softer second-quarter core PCE inflation figure pulls rate expectations back toward a hike-free October, a day after strong payrolls had pushed them the other way.
Published
Traders pared bets on an October Federal Reserve rate increase on Wednesday after a revised reading on second-quarter core PCE inflation came in far below forecasts. Core PCE inflation for the second quarter was revised to 0.3%, versus a forecast of 3.6% and an initial reading of 3.3%.
The figure lands in the middle of a week of conflicting signals for the Fed. On Tuesday, traders had cut the odds of an October hike to 50-50 from 70% after New York Fed President John Williams said policymakers were in no rush to act. Those odds had firmed again after September payrolls grew by 90,000, beating a forecast of 38,000 and topping August's 75,000 gain, a beat that had reintroduced hawkish risk to the debate.
The rate repricing has already moved other markets this week. The euro fell to $1.1312 on Tuesday, its weakest level since May 2025, as the dollar gained on the shift in hike odds. The 30-year fixed mortgage rate climbed to 7.3%, the highest since November 2023, and mortgage applications fell 6.0% in the week ended September 25, a steeper drop than the prior week's 1.5% decline. Fed Vice Chair Alberto Musalem has said spending on artificial intelligence is adding to inflation pressure, with productivity gains and supply relief yet to show up in the data.
Wednesday's softer reading gives the market fresh grounds to fade the higher-for-longer narrative that had driven the 10-year Treasury yield above 5.2% and pushed mortgage rates to their current level. But it also widens the gap between Fed officials' repeated warnings about persistent inflation and the market's repricing this week, leaving the next data release or Fed remark to carry outsized weight in deciding whether an October increase actually happens.