Markets wasted no time pricing in the new inflation data, with investors raising the probability of a Fed rate hike in October to 35%.
New inflation data released on Wednesday is raising the odds of a Federal Reserve interest rate hike later this month, potentially putting a spotlight on rising mortgage rates ahead of the midterm elections.
Overall prices jumped 3.7% in the 12 months through September, according to consumer price index data release by the Labor Department. That's up from 3.4% annual inflation the prior month, and more than economists had expected.
Markets wasted no time pricing in the new inflation data, with investors raising the probability of a Fed rate hike in October to 35%, up from 22% a day earlier, according to CME FedWatch.
On prediction marketplace Polymarket, the odds of an October hike briefly spiked to nearly 50% immediately after the CPI report, but settled back closer to 30% later in the day.
Bond markets reacted immediately as well, with the 10-year Treasury yield jumping 5 basis points on the release and 11 basis points within 15 minutes. The 10-year is a key benchmark for mortgage rates, which last week hit a three-year high of 7.40%.
Although most analysts still expect the Fed to avoid raising rates just a week before the midterm elections, market reaction to the CPI report suggests that the outcome of the meeting is uncertain, with inflation remaining a pernicious issue.
“Some CPI reports seem backward-looking and stale, while others seem like they’re foreshadowing what’s to come,” says Realtor.com® senior economist Jake Krimmel. “This one definitely feels like the latter.”
Wednesday's CPI report is the last inflation data Fed policymakers will get before the Oct. 27–28 meeting of the Federal Open Market Committee, which sets the overnight interest rate for lending between commercial banks.
The Fed uses higher interest rates to fight inflation and lower rates to stimulate the job market. At its last meeting on Sept. 16, the FOMC raised the federal funds rate for the first time in three years, hiking it a quarter-percentage point to a range of 3.75% to 4.00%.
Most analysts expected the Fed to stand pat at the October meeting, which falls just a week before the midterm elections, to avoid any suggestion of political interference. Instead, experts were looking for one more hike this year at the December FOMC meeting.
New York Fed President John Williams, an influential member of the FOMC, bolstered that sentiment with comments earlier this week saying he believed only one additional rate hike would be necessary this year.
On Sunday, economists with the Mortgage Bankers Association issued their annual forecast, predicting a single rate hike in December of this year and one further increase in the first quarter of 2027.
Krimmel still believes the September inflation data probably isn’t enough to sway the FOMC to raise rates in October.
"But a hold is hardly the slam dunk it was earlier," he says. “Today’s numbers all but guarantee a hike by December though, while further opening the door for one or more hikes in early 2027. We are in 'when' not 'if' territory when it comes to the next Fed rate increase.”