Fed rate hike bets for Oct fall sharply on soft data, dovish comments

Markets have significantly reduced their expectations for a Federal Reserve interest rate increase in October following weak labor data and comments from a policymaker. Currently, there is a 49.4% probability that the Fed will raise rates to 4.25% in October, down from 74.6% a day earlier, according to CME Fedwatch. Additionally, the probability of an October hold has surged, now at 50.6%, up from 25.4% previously.

This shift in expectations is primarily due to New York Fed President John Williams stating there is "no need for urgency" in raising rates and that the central bank only requires one more rate hike to combat inflation. Williams mentioned that the need for additional hikes has decreased after the Fed raised rates by 25 basis points to 4.0% in September.

He also stated that forthcoming data will provide more clarity on the economy and rates. Meanwhile, weaker-than-expected JOLTS job openings data has negatively impacted rate hike bets, as maintaining stable employment is one of the Fed's primary considerations for interest rates, alongside inflation. Weak consumer confidence data has also raised questions about the Fed's ability to hike rates further.

The central bank had taken a hawkish stance during its September meeting, with Chair Kevin Warsh reaffirming its commitment to bringing inflation within its 2% annual target. Upcoming data, including the PCE price index for August and September's nonfarm payrolls, is expected to offer further insights into the Fed's plans, with core PCE anticipated to remain well above 2%.