Traders sharply cut expectations of a US Federal Reserve rate hike in October after New York Fed President John Williams indicated there is no need to rush further tightening, Barron's reports. He is one of those who has a vote on the Federal Reserve's Open Market Committee and is considered one of the most influential participants, the publication writes.
Details
The probability that the regulator will raise the rate at the next meeting on October 27–28 is now estimated at 47%, whereas just the day before it was above 70%—showing what the FedWatch market sentiment monitoring tool indicates.
Speaking on September 29 at the University at Buffalo, the head of the New York Fed said that his baseline scenario calls for only one round of tightening monetary policy this year. This matches the median forecast of participants in the Federal Open Market Committee. At the same time, Williams believes that after the September increase, “there is no need to rush.” In his view, it may be appropriate to raise the rate closer to the end of 2026—that is, in December, when the last of the two remaining meetings of this year will take place. That way, Fed officials will have time to gather more information about the trajectory of price growth.
“Williams very clearly came out against a second consecutive increase in the Fed rate in October,” analysts at Evercore ISI said in a note, cited by Bloomberg.
That said, some Fed officials are more hawkish. Almost at the same time as Williams, Federal Reserve Board Governor Michael Barr said that “further adjustments to monetary policy are likely to be needed,” because he does not yet see a “clear trend toward the timely return of inflation to [the target level] 2%.” And the president of the Chicago Federal Reserve Bank, Austan Goolsbee, warned that keeping inflation above 2% for 5.5 years, as the median forecast assumes, amounts to “playing with fire.”
What about inflation
Due to a sharp rise in oil prices stemming from the Iranian crisis and large-scale infrastructure construction for AI, Williams expects inflation to be 3.5% by the end of this year. However, as the impact of tariffs fades and energy prices normalize, he projects a slowdown next year to slightly above 2% and a return to the 2% target by 2028. But this course of events is not guaranteed, the head of the New York Fed emphasized.
“Although monetary policy cannot make ships move or reopen pipelines and refineries, it can reduce the risk that supply shocks [in oil] will lead to broader and more persistent inflationary pressure,” Williams said.
On Wednesday, September 30, the Fed’s preferred inflation measure will be released: the index of Americans’ personal consumption expenditures (PCE). But these data are unlikely to be an argument against further tightening of the regulator’s policy, CNBC believes. Wall Street’s forecast assumes that in year-over-year terms the overall and core PCE indices will have risen in August by 3.7% and 3.3%, respectively—as they did in July. If that holds true, the figures will point to ongoing price pressure.
“The Fed will look at these data and say: ‘Core inflation isn’t falling, and we have no reason to expect that it will start moving down convincingly in any way,’” CNBC senior economist at Allianz Trade Dan North said. “I think inflation has become so entrenched that the Fed can no longer ignore it or explain it away as temporary factors.”ㅤ