According to the latest Polymarket figures, Fed rate hike probability has fallen to just 13% as of Friday, down from approximately 30% before recent developments. The probability of holding rates steady stands at near 90%, while the market assigns less than 1% chance to either a rate cut or a larger increase. As reported by Polymarket, the contract has attracted tens of millions of dollars in trading volume, reflecting significant interest in the central bank's next move. The weekly decline of 16 basis points represents the most significant drop since July 2025, highlighting the market's growing caution about near-term policy shifts. However, recent developments show even further decline, with futures markets now implying less than 20% chance of a rate increase next week, down from as high as 70% three weeks ago, according to Investing.com India.
The latest nowcasts for next week's third-quarter GDP report offer little support for those expecting slower economic growth to cool inflation pressures. According to The Capital Spectator, output is on track to increase at an annualized 3.2% for the July-through-September period, representing a solid improvement over Q2's 2.2% rise. The median estimate remains unchanged from the previous nowcast published on October 9, suggesting relatively high confidence in the outlook for the October 29 Bureau of Economic Analysis release. Stronger growth would add another wrinkle to the inflation debate as concerns about price pressures intensify, with last week's trifecta of hotter-than-expected inflation reports suggesting that price pressures may be accelerating.
The bond market sent a somewhat nuanced message last week regarding inflation risks and monetary policy expectations. Hotter-than-expected CPI and PPI reports initially triggered a Treasury selloff, pushing the 10-year Treasury yield as high as 5.3% and lifting expectations that the Fed could remain hawkish. However, yields retreated later in the week as investors stepped back into Treasuries despite the inflation data. As reported by Investing.com, this suggests that while the bond market acknowledges inflation risks, it is becoming less convinced that stronger inflation automatically translates into materially higher long-term interest rates. The policy-sensitive 2-year yield fell to 4.72% on Friday, the lowest close in nearly a month, though it remains well above the Fed's current 3.75%-4.0% target range. The current 10-year Treasury yield is only about 10 to 15 basis points above its level after the Fed's September vote, according to Investing.com India, which some Fed officials suggest could do the Fed's job for it.
Energy prices have emerged as a significant driver of recent inflation, with gasoline alone accounting for more than half of the monthly 0.6% consumer price rise in September, according to Bureau of Labor Statistics data. FedWatch Advisors founder Ben Emons notes that energy prices tend to fall when the dollar strengthens, making higher rates one potential mechanism to achieve that outcome. However, he does not call the current setup stagflation, since unemployment is not rising, instead describing it as "stallflation" - a mix of economic slowdown and persistent inflation. The September CPI showed energy prices eased from their spring peak but are climbing again, with the September PPI showing even more pricing pressure in the pipeline as energy costs feed into non-energy goods and services. Market participants had anticipated that Treasury Secretary Scott Bessent might request views on reducing long-term debt supply, but the department's questionnaire asked more generally about future auction size changes, disappointing traders looking for direct signals about potential changes to the government's debt issuance schedule.
The Fed's September rate hike was driven by risk management principles, with all participants supporting a 25 basis point increase to 3.75%-4.0% based on the changing balance of risks. As reported by Investing.com India, risk management was the most common reason given in the FOMC minutes for the September rate increase, with participants viewing a higher target range as prudent insurance against inflation remaining persistently above target. The standard for raising rates centers on confidence: "We must be confident that underlying inflation is moving to our objective, clearly and at sufficient speed. Otherwise, we have work to do," as offered by former Fed Governor Kevin Warsh at Jackson Hole in August. However, confidence in disinflation has slipped further as PCE inflation reached 3.4% in August, well above the Fed's 2% target, with core CPI excluding food and energy rising 0.33% annually. The Beige Book reinforced upside risks to inflation, with higher oil prices and fuel surcharges cited across districts, while Brent crude futures show strain with December 2027 delivery around $90 per barrel, the highest since the conflict began. Despite these challenges, the Fed must maintain its independence and ground decisions in economics rather than politics, even as the vote comes less than a week before midterm elections.
