Fed Rate Hike Odds Swing After Hot CPI Upends September Consensus

A unanimous vote, followed by mixed data

The Federal Reserve's September rate hike was meant to show that the committee had settled its disagreements. Four weeks later, the data that followed has divided the outlook again. On September 16 the Federal Open Market Committee raised the federal funds target range by a quarter point to 3.75%–4.00%. The vote was 12-0, and it was the first increase since 2023.45 At the July meeting the committee had held rates by a 9-3 vote, with three members pushing for an immediate hike, so the unanimous September decision looked like Chair Kevin Warsh bringing the committee together behind a harder line on inflation.35

The minutes, released October 7, backed up that reading. All participants supported the increase. Most also judged that another hike before year-end would likely be appropriate, while saying they would decide one meeting at a time.12 Since then, the economic data has pointed in two directions. The market reaction across stocks, Treasuries, oil and bitcoin has moved with it.

Why the September case looked strong

The reasons given in September were clear. Warsh said three things had changed since July: the economy had strengthened, inflation had not slowed, and geopolitical tensions had grown.8 The war with Iran has pushed up energy prices, and CNN described that energy shock as the main force making inflation more persistent.8 Warsh called the hike the removal of "a dose of accommodation." He also said he found it hard to call financial conditions restrictive, given strong hiring, corporate earnings and credit flows.5

The minutes show that the vote was unanimous but the reasoning was not. Many participants saw the hike as insurance against inflation staying above target. Another group thought it was needed to stop the energy shock from spreading into broader prices. A smaller group thought the neutral rate had risen.10 This is the key to the current debate: officials who all voted yes on September 16 can disagree about whether a second hike is urgent.

The projections pointed in the same direction. Sixteen of 18 officials saw room for at least one more quarter-point hike this year, and four pencilled in two.2 The median projected rate was 4.1% for both 2026 and 2027, which suggests one more move and then a pause, not a long tightening cycle.7

First, the data turned soft

The first change came from inflation and jobs. Core PCE, the Fed's preferred inflation gauge, rose 3% in August, below the 3.3% that forecasters expected and down from 3.3% in July.1 CNBC noted that part of the improvement came from changes in how some components are calculated.6 The September jobs report was weaker still: payrolls grew by only 29,000 and unemployment edged up to 4.2% from 4.1%.1

Several senior officials had already signalled caution. Vice Chair Philip Jefferson and New York Fed President John Williams both suggested the Fed could take its time, and Williams said he saw "no need for urgency."1 Markets moved quickly. Futures had priced roughly a 70% chance of an October hike just after the September meeting, and by the time the minutes came out that had dropped below 20%.10 One tally of CME FedWatch data showed October odds at 74.6% on September 29, about 23% after the payrolls report, and around 16% by October 9.18 Goldman Sachs moved its forecast for the next hike from October to December, and a survey of 14 brokerages found that only one, BofA, still expected an October move.18

The yield curve reflected the change. The two-year Treasury yield, which tracks expected Fed policy most closely, fell more than 12 basis points in a week to about 4.78%.10 Stocks rallied, and the S&P 500 finished the week of October 9 up 1.2%.12

Then September CPI ran hot

The September consumer price report, released October 14, cut that rally short. Headline inflation reached 3.7%. Navy Federal Credit Union economist Heather Long called the October decision a "coin flip" between a second straight hike and a hold.9 Long said price increases now look more broad-based and entrenched than economists had assumed, with monthly gains in used cars, apparel and medical care services.9 Gasoline made up more than half of the monthly rise, and the pickup in core inflation suggests energy costs are starting to feed into services.17

Reports differ on how far the odds moved. The Hill said CME-implied odds of a hold fell from about 78% to about 67%.9 CoinDesk said Polymarket odds of an October hike briefly reached nearly 50% before settling around 30%.16 Blockhead put the CME-implied probability at 54% before comments from Governor Michelle Bowman and San Francisco Fed President Mary Daly brought it down to 32%.17 The figures differ because they come from different venues and different times of day. They tell the same story, though: the market briefly treated October as a live meeting and then partly backed off. Almost all of the uncertainty is about timing. Markets still price roughly a 90% chance of a hike by December.17

The figures for underlying inflation also vary between outlets, so they should be read with care. Warsh estimated core PCE near 3.2% at his September press conference, while the PCE figure released afterwards showed 3%.71 Another market newsletter put core CPI at 3.3% year over year.15

Oil is driving inflation risk

Oil prices are the clearest link between the Middle East and the Fed's decision. On October 12, WTI crude fell sharply overnight after President Trump announced an energy ceasefire. It then rebounded above $94 as Houthi attacks on Saudi Arabia, including strikes on Riyadh's airport, raised doubts about whether the truce would hold.14 The next day crude rose again on reports that Trump and Israeli Prime Minister Benjamin Netanyahu had discussed possible action against Iran, alongside attacks on ships near the Strait of Hormuz.11 Brent settled near $105.69 that day.13

Futures prices may understate how tight supply is. One analysis found that dated Brent, the price refiners pay for crude delivered now, stood at $125.44 against futures near $104.97. That gap of about $20 suggests a physical shortage, and the newsletter estimated it could add half a point to headline CPI.15 OPEC+ kept November quotas unchanged.15 Brent is up more than 70% since the start of the year.20 With a central bank that has said inflation is its top priority, this is the most direct route by which geopolitical events could push the Fed toward another hike.

Stocks and bitcoin are reacting to yields

The stock market's reaction to the CPI report showed how closely it is tied to rate expectations. On October 14 the S&P 500 fell 1.11% to 7,718.94 and the Nasdaq fell 1.88%, while the dollar index rose to a 15-month high.20 A day earlier, stocks had recovered late in the session after Williams said one more hike this year still looked appropriate but further increases in 2027 likely would not be needed.13 Traders took that as a sign the cycle could end after one more move.20 The 10-year yield, which had been around 5.22%, fell to about 5.08% after the Bowman and Daly comments, its lowest level since September 25.1117

Bitcoin has moved with rate expectations much as stocks have. It fell below $81,000 after the CPI report, and spot bitcoin ETFs recorded $150.5 million of outflows on October 14, reversing the previous day's inflows.16 By October 16 it had recovered to about $82,060, still around 35% below its all-time high of $126,080.17 Bitcoin's intraday swings have tracked oil prices, yields and chip stocks rather than news specific to crypto.1411 Analysts at QCP put the fourth-quarter base case at $80,000 to $90,000 and named ETF flows, oil and the Fed as the deciding factors.19

Our reading: a hold in October, with another hike still likely

Taken together, the evidence favours a hawkish hold on October 28, with December the more likely date for a second hike, not an end to tightening. The minutes show a committee that is united on direction but divided on urgency.10 Weak payrolls give the more cautious officials a reason to wait. Hot CPI and oil prices of about $105 make it hard to rule out further hikes.19 The main risk to that view is oil. A further jump in physical crude prices or a collapse of the energy ceasefire would quickly strengthen the case for a hike that hawkish officials already favour. Until then, stocks and bitcoin are likely to keep trading on Fed commentary and oil headlines, because the October CPI report will not arrive until after the meeting.17