Hot September inflation leaves traders split on Fed holding rates in January

Traders are nearly evenly split on whether the Federal Reserve will leave interest rates unchanged after its January meeting, with a narrow lean toward a hold. A hotter-than-expected inflation report pushed expectations from favored to close to a toss-up.

The Bureau of Labor Statistics reported on Oct. 14 that consumer prices rose 3.7% in September from a year earlier, and core inflation, which strips out food and energy, rose 2.6%. Forecasts before the release were 3.6% and 2.5%. The reading, especially the core figure, reinforced the case for further Fed tightening, and it likely explains the drop in expectations, which began within minutes of its publication, according to the bureau's data.

The move was sharp. Bets on a January hold held steady at the start of last week and strengthened modestly on Tuesday. They then fell quickly on Wednesday morning, when the report came out, and went from likely to close to a toss-up. A quarter-point increase in January, the main alternative, remains unlikely but gained ground in the same minutes.

The report also strengthened bets on another increase this year. Traders pushed up their expectations of a 2026 hike, which they already thought likely, and they favor a quarter-point increase at the December meeting. Their overall view of where rates end the year centers on a range of 4.25%, with outcomes running from 4% to above 4.5%. Meanwhile, traders see the Fed standing pat at its late-October meeting as likely, a view that firmed after the inflation data.

The day before the report, New York Fed President John Williams said another hike this year remained appropriate. That is background rather than the reason for the latest move.

The next signal is the Fed's late-October meeting, followed by the January decision and further inflation data. Persistent price pressure or Fed guidance favoring more tightening could weaken the case for a January hold. Cooling inflation or signs that earlier increases are enough could strengthen it.