Markets Now Price 73% Odds of October Fed Rate Hike After Barr Comments and Hot Inflation Data

Markets on Wednesday priced in a better than 70% chance that the Federal Reserve will approve another interest rate hike when it meets next in October, after comments from Fed Governor Michael Barr and an S&P Global report showing inflation at its highest level in nearly four years.

The odds of a hike when the Federal Open Market Committee meets on Oct. 27-28 jumped to 73%, according to the CME's FedWatch, which calculates the probability based on 30-day Fed funds futures contracts.

Barr Says More Work To Do

In remarks prepared for a housing conference in Chicago, Barr said policymakers still have more work to do even after last week's quarter-percentage-point increase.

"In my base case, further policy adjustments are likely to be needed to ensure inflation comes down to target in a timely fashion," he said. "We want to support sustainable, durable growth in support of maximum employment, and price stability is crucial to that."

Inflation Gauges At Multi-Year Highs

The remarks landed the same day S&P Global said its flash gauges on both the manufacturing and services industries hit their highest levels in more than four years.

The services index measured from purchasing managers' responses hit 58.7, its highest in 59 months. The manufacturing index jumped to 56.7, a peak going back 53 months. The composite rose to 58.4, a 62-month high. Any reading over 50 represents growth.

Price pressures came with the expansion. S&P Global said its overall inflation measure hit its highest level since October 2022, driven by higher fuel and transportation costs as well as rising wages.

"Firms' input costs have meanwhile jumped in September at the steepest rate for four years, with fuel and transport costs spiking higher thanks to the rise in oil prices seen during the month, which will add further to the upward pressure on selling prices and inflation in the coming months," said Chris Williamson, chief business economist at S&P Market Intelligence.

Hiring Still Running Hot

On the employment side of the Fed's dual mandate, companies reported needing more workers to handle order backlogs. Job growth in the PMI surveys rose "at a rate not seen since June 22 and a pace rarely exceeded since comparable data were first available in 2009," S&P stated in its survey narrative.

Service sector employment hit its fastest expansion rate since June 2002, while manufacturing was at its highest pace since February 2021.

Markets reacted aggressively. Treasury yields soared, with the 2-year note, considered the most sensitive to Fed policy expectations, climbing more than 13 basis points to 4.9%. One basis point equals 0.01%, and yields move opposite prices.

What It Means For The Naira

A October hike would keep US dollar yields elevated, sustaining the carry advantage that has pulled capital toward dollar assets and away from frontier and emerging markets. For Nigeria, that backdrop typically means continued pressure on the naira, higher import financing costs and a tighter dollar supply environment heading into the final quarter of the year.