Fed Hike Odds Surge Past 70% After Barr Speaks and Inflation Data Hotens

Financial markets are increasingly anticipating that the Federal Reserve will raise interest rates at its upcoming meeting in October, with probability models now indicating a better than 70% chance of a hike. This shift in sentiment follows comments from Fed Governor Michael Barr supporting further monetary tightening and the release of fresh economic data revealing significant inflationary pressures.

Barr delivered his remarks ahead of a housing conference in Chicago on Wednesday, suggesting that the central bank has not yet completed its work despite the quarter-point increase implemented the previous week. “In my base case, further policy adjustments are likely to be needed to ensure inflation comes down to target in a timely fashion,” Barr stated. He emphasized that maintaining price stability remains essential for fostering durable economic growth and maximum employment.

The governor’s comments coincided with a report from S&P Global indicating that both manufacturing and services activity hit their strongest levels in over four years. The flash composite purchasing managers’ index (PMI) reached 58.4, marking a 62-month high. Specifically, the services sector index climbed to 58.7, its highest point in 59 months, while the manufacturing index rose to 56.7, topping out at a 53-month peak. Any PMI reading above 50 signifies expansion.

Price pressures within the economy were also highlighted in the report. S&P Global noted that its overall inflation gauge reached its highest level since October 2022. Chris Williamson, chief business economist at S&P Market Intelligence, attributed the surge to escalating fuel and transportation costs driven by rising oil prices, alongside increasing wages. “Firms’ input costs have meanwhile jumped in September at the steepest rate for four years,” Williamson said, warning that these factors would continue to push selling prices upward.

Labor market data from the surveys also pointed to robust demand. Companies reported requiring additional workers to manage order backlogs, with job growth expanding at the fastest pace since June 2022 and the quickest rate for the services sector since June 2002.

Investors reacted swiftly to the combination of Barr’s dovish-turned-hawkish stance and the heated economic indicators. According to the CME Group’s FedWatch tool, which derives probabilities from 30-day fed funds futures contracts, the odds of a rate increase at the Federal Open Market Committee’s Oct. 27-28 gathering climbed to 71%. Concurrently, Treasury yields surged, with the 2-year note—widely regarded as the most sensitive barometer for Fed policy expectations—gaining more than 13 basis points to reach 4.9%.