Fed October hike odds top 70% as inflation fears build, yields surge

Expectations for a Federal Reserve rate hike in October surged past 70% Wednesday on the back of hawkish central bank commentary and a fresh wave of inflationary pressures that pushed Treasury yields to new multi-year highs.

Federal funds futures traders now price in a 70.9% probability that the Fed will raise its benchmark overnight rate by 25 basis points to a range of 4.00% to 4.25% at its Oct. 28 meeting, up from a 55.4% chance just a day ago.

Market participants are also bracing for the possibility of even more tightening before the year is out. Additional futures data from CME Group indicates a 55.7% chance that the target rate will climb a full 50 basis points higher to the 425 to 450 basis point range by the Dec. 9 meeting.

The repricing comes on the heels of the Fed’s decision last week to hike rates in response to persistently elevated inflation readings fueled by rising energy prices.

That tightening momentum was bolstered by data out showing a jump in U.S. business activity at its fastest pace since 2021, along with remarks from Fed Governor Michael Barr. Stressing that risks to achieving the central bank's inflation target have increased, Barr warned that further rate hikes are likely necessary.

As inflation fears mount amid higher oil prices and resilient economic growth, the yield on the benchmark 10-year Treasury note US10Y spiked 5.10%—marking a fresh 19-year high—reflecting deepening investor anxiety over a restrictive, higher-for-longer monetary policy regime. At the belly of the curve, the five-year tenor (US5Y) surpassed 5.0% for the first time since 2007.