The Odds Of At Least One Fed Rate Hike By October Surge To 25 Percent

What happened? Two things discussed below.

Target Rate Probabilities for October from CME Fedwatch

October 2026 Fed Rate Probabilities

No Change: 71.5 Percent
Quarter-Point Hike: 24.0 Percent
Half-Point Hike: 2.8 Percent
Three-Quarter-Point Hike: 0.1 Percent
Quarter-Point Cut: 1.6 Percent

The net is 25.3 percent for at least one quarter-point hike. That is up from 4.2 percent yesterday.

What Happened?

Trump is sending more troops and warships to the Middle East. This has rattled the markets.
Fed Governor Christopher Waller changed his tune from supporting rate cuts.

There is no economic news today that may have influenced the bond markets like this.

Iran War Prompts Caution From a Fed Dove

WSJ: Federal Reserve governor Christopher Waller has supported interest-rate cuts for most of the past year and dissented against the central bank’s decision to hold rates steady in January. He was ready to dissent again this week, he told CNBC on Friday morning, but the closure of the Strait of Hormuz and the potentially inflationary effects of a global oil crunch led him to vote for a pause instead.
“Two weeks ago, when the jobs report came out and it was negative 92,000, I thought, that’s it. I’m dissenting,” Waller said in the TV interview. “Since that time, the Strait of Hormuz was closed, this is looking like it’s going to be a much more protracted conflict, and oil prices are going to stay high for a long time.”
Waller’s comments show how anxiety about the inflationary effects of the war helped Chair Jerome Powell build an 11-1 majority in favor of holding rates steady this week. Over the past year, Waller has resisted the argument that President Trump’s tariffs are likely to lead to sustained inflation, but he warned Friday that an oil shock could be different.

Weighted Average CME Fed Target Rate Probabilities

Today’s jump in rate hike odds did not change the overall probabilities that much. This is because of the high odds the Fed does nothing at all.

Here’s another way to calculate. A 25 percent chance of a quarter-point change changes the basis point odds by 0.25 * 0.25 = 0.625 (6.25 basis points).

Looking Further Out

I calculated the implied target rate for March 2027 at 3.68 percent. That’s the same as December.

For June of 2027, the implied target rate is 3.61 percent.

Thus, the market expectation is now that the Fed will do nothing for over a year!

Meanwhile, the odds of hikes keep rising slowly but surely. That’s because the market is becoming more and more convinced high oil prices are here to stay.