Two Fed rate hikes this year look likely, and exactly three remains a long shot

On the eve of the Federal Reserve's October meeting, traders still see exactly three rate hikes in 2026 as a long shot. Their central expectation is two hikes for the year, with a range of one to two.

The Fed raised its target range by a quarter point on September 16, to 3.75%-4.00%. That was its first increase in three years, and it leaves one hike so far this year. Reaching exactly three would take two more, and a 50-basis-point move would count as two under the rules of this bet. Traders expect the year to end with the Fed's rate at 4.25%, within a range of 4% to 4.25%.

The meeting runs Tuesday and Wednesday, and the Fed announces its decision and Chair Kevin Warsh holds a press conference on Wednesday. Reuters reported Monday that futures point strongly to no change in October. Traders see a hold as all but certain, and a quarter-point increase at the December 8-9 meeting as the likeliest outcome there. Another increase later in the year remains under discussion.

The bets on three hikes have been through a sharp swing this month. They started October as a long shot and edged up in the days before the September inflation report. On October 14 the Bureau of Labor Statistics reported that consumer prices rose 0.6% in September from August and 3.7% over the year, with core prices up 0.3% on the month and 2.6% on the year. Reuters reported that the hotter-than-expected core figure revived the possibility of an October hike. Bets on three hikes surged that day, briefly reaching the edge of reach, before closing well below the peak.

They fell back on October 16, the day Warsh said he would not prejudge the October or December decisions, and reporting later described policymakers as signaling no rush to hike in October. The bets then slid for most of the next week and slipped again Monday. No new event explains the latest drift. The check-in reflects the timing of the meeting, not a fresh move.

Minutes of the September meeting, released October 7, said most participants thought another increase would likely be appropriate by year-end. That supports the case for a second hike, but it does not settle whether a third would follow.

The next data points could shape the December debate. The September Personal Income and Outlays report, which includes the Fed's preferred PCE inflation measure, is due October 29. October consumer prices are due November 10. Energy prices and further guidance from Fed officials could also matter. A third hike would need the central bank to move beyond the two-hike path traders now expect.