October Fed Meeting: Rate Hike Now the Market's Base Case

Market expectations for U.S. monetary policy have taken a decisive turn. According to the latest data from CME Group's FedWatch Tool, derived from trading in 30-Day Fed Funds futures, traders now assign a higher likelihood to a rate increase at the Federal Reserve's upcoming October 31-November 1 policy meeting than to no action.

The October Decision: A Tipping Point

The probabilities show a nuanced but significant shift. The market currently prices in a 46.9% chance that the Fed holds the federal funds rate steady at its current target range of 5.25%-5.50%. Conversely, the probability of a 25-basis-point hike, which would push the upper bound to 5.75%, stands at 53.1%. This suggests investors believe resilient economic activity and a tight labor market could compel the Fed to deliver one more "insurance" hike to firmly anchor inflation expectations.

The 2023 Endgame: Mapping the Path Higher

Looking ahead to the final FOMC meeting of the year in December, the market's outlook becomes more layered:

  • The odds of no further hikes by year-end are a mere 9.4%, virtually dismissing the prospect of a complete pause.
  • The probability of a cumulative 25-bps increase (one hike) is 48.1%.
  • The probability of a cumulative 50-bps increase (two hikes) is substantial at 42.5%.

In essence, the market sees over a 90% chance of at least one more rate increase before 2024. This solidifies the "higher for longer" narrative, indicating expectations that the Fed will maintain a restrictive policy stance for an extended period to ensure inflation sustainably returns to its 2% target.

Implications and Moving Parts

This repricing is largely fueled by recent data pointing to enduring economic strength, which could slow disinflationary progress. For financial markets, elevated terminal rate expectations typically pressure equity valuations while supporting the U.S. dollar and Treasury yields, particularly on the short end of the curve.

It's crucial to remember that these are live, implied probabilities based on derivative prices, not a Fed forecast. They remain highly sensitive to incoming economic indicators—like CPI and jobs reports—and commentary from Federal Reserve officials. The path for the remainder of 2023 is still very much data-dependent.