At its September meeting, the Fed not only raised rates by 25 bps but also signaled a more hawkish path, with rates 0.3 pp higher in 2026 and 0.5 pp higher in 2027–2028, staying elevated through 2029. The Fed Chair also repeatedly stressed at the press conference that the economy remains strong, which, in his view, means monetary policy needs to stay tight for longer.
Combined with high diese and oil prices, this suggested another Fed hike in October, but the picture has begun to shift in recent weeks.
First, the US Personal Consumption Expenditures (PCE) price index rose 0.3% month-over-month in August, below the 0.4% expected. Second, the Conference Board’s consumer confidence index fell to 81.9 from 88.6, its lowest level since April 2014. Most importantly, the US unemployment rate rose to 4.2% in September, above the expected 4.1%, while the economy added just 29,000 jobs versus the expected 89,000, down from roughly 133,000 in August.
Hence, markets hope the Fed will keep rates unchanged at its October meeting.
Fed officials have also become more cautious, with New York Fed President John Williams and Fed Governors Michelle Bowman and Philip Jefferson all essentially making the same point: there is no need to rush, and “more time is needed” to get a better sense of where the economy is heading.
If so, this could ease some pressure on the bond market, but I wouldn’t expect a major relief rally, as the situation in the Middle East is still far from resolved and could flare up again after the November elections. On top of that, other fundamental issues, like the huge US fiscal deficit, aren’t going away either.
Still, with the Nasdaq already hitting new all-time highs, investors seem happy for now with one simple fact: the Fed probably won’t hike rates in October. Upcoming corporate earnings could also help ease some of the worries, with analysts expecting S&P 500 earnings to jump more than 30% year-over-year, largely driven by AI-related companies.
Now, if earnings disappoint even slightly, this optimism could quickly turn into caution. But that hasn’t really happened in recent quarters. In Q2, for example, 86% of S&P 500 companies beat analysts’ EPS estimates, one of the highest beat rates on record.