Fed’s Two Vice Chairs Signal Patience: October Rate-Hike Odds Plunge to 24%

Fed’s Two Vice Chairs Signal Patience: October Rate-Hike Odds Plunge to 24%

TREE NEWS reports: Two of the Federal Reserve’s most senior officials delivered back-to-back remarks on Thursday indicating that the central bank is in no hurry to raise interest rates again, sharply cooling market expectations for another hike at the October 27-28 meeting. Fed Vice Chair Philip Jefferson, who oversees monetary policy, and Vice Chair for Supervision Michelle Bowman both stressed that officials need more time to assess incoming economic data before deciding their next move.

Jefferson, speaking at the University of Virginia in Charlottesville, warned that inflation has run too high for too long and that the risk of it staying elevated persists. Still, he said he and his colleagues are navigating a cascade of economic shocks and must carefully evaluate data trends, the evolving outlook and the balance of risks. “Any future policy adjustment should be determined by carefully examining data trends, the evolving outlook and the balance of risks,” he said. “My colleagues and I will need to make our own judgments, and that may take more time.”

Bowman, speaking in Washington at an Atlantic Council event, echoed that view: “I don’t currently see an urgent need to take further action, and I think we need to better understand the overall data while also staying focused on risks.”

Market Pricing Shifts Dramatically

The comments reinforced remarks from New York Fed President John Williams on Tuesday, who said there was no urgency to consider another hike after September’s move. All three officials hold permanent votes on the Federal Open Market Committee. Earlier this week, federal funds futures implied roughly a 70% probability of an October hike. After Williams’ comments and Wednesday’s PCE inflation data, that fell below 35%, and following Jefferson’s speech it dropped further to about 24%. December pricing now shows a 61% chance of a 25-basis-point hike and an 18% chance of a 50-basis-point move.

Separately, Minneapolis Fed President Neel Kashkari said he expects further tightening to restrain the economy through 2027 but is unsure whether the next hike should come this month. He described himself as “open-minded” and said he has “no strong inclination” about acting at the October meeting. Kashkari, who supported September’s increase to a 3.75%-4.00% range, noted that data since then has shown the economy performing better than he expected, with inflation still too high—meaning the policy rate could ultimately need to rise further than he currently anticipates.

Fed Governor Lisa Cook added a structural note, arguing that supply shocks have proven unexpectedly persistent and are becoming more prominent, complicating the traditional playbook of looking through them. She said the Fed must ensure inflation expectations stay anchored, and flagged AI buildout as adding inflationary pressure with uncertain timing for productivity gains.

Market Implications

• Rates and bonds: Reduced near-term hike odds should cap upward pressure on short-end yields, though Jefferson noted yields across the curve have risen since September as investors reassess the macro backdrop. A less aggressive Fed is modestly supportive of duration.
• Equities: Lower October hike probability is a tailwind for risk assets, particularly rate-sensitive growth and tech names, though the Fed’s insistence that the tightening cycle may not be over limits the upside.
• US dollar: A slower hike path trims some dollar support, but with December still in play and other central banks easing, the greenback’s downside may be contained.
• Gold and commodities: Softer real-rate expectations are supportive for gold; energy prices remain a wildcard given Jefferson’s mention of energy-driven inflation.
• Crypto: Digital assets, highly sensitive to liquidity expectations, typically rally when hike odds fall, though lingering December risk keeps volatility elevated.

Key Takeaways for Investors

• The Fed is shifting from action to assessment mode: the bar for an October hike has risen materially.
• This is a pause in tone, not necessarily the end of the tightening cycle—December remains live.
• Data dependence means upcoming inflation and labor reports will drive sharp repricing in both directions.
• Supply shocks and AI-driven demand are emerging as new, harder-to-model inflation risks.
• Position for range-bound rates and elevated volatility rather than a clean pivot.