October Fed rate hike odds rise sharply after September CPI

The odds for the Federal Reserve to raise the base interest rate by 25 basis points rose sharply from about 19% on Tuesday to 37% on Wednesday after the US Bureau of Labor Statistics said annual inflation rose by 3.7% in September. 

Earlier in the week, expectations for a higher-than-forecast CPI of 3.6% began to have an impact on markets, with several stocks shading last week’s gains. That impact found its way into the prediction markets platforms, with annual CPI odds of 3.6% and 3.7% constantly swapping positions.

On Monday, traders believed 3.7% was the more likely outcome, giving it a 44% chance versus 3.6% at 41% chance. On Tuesday, they had swapped places to 45% chance for 3.6% and 37% for 3.7%. 

Subsequently, odds for a no-hike in October had fallen from 84% on Monday to about 81% on Tuesday as fears of a higher-than-expected CPI grew, and have since fallen to 63%. Odds for a 25-basis-point hike increased from 17% to 19% between Monday and Tuesday, before spiking to 37% on Polymarket after the CPI data. Traders can now buy a no-hike bet at $0.63, while a 25-basis-point hike is trading at $0.38 per share.

Should traders add to their no-hike bets at the new discounted rate?

While the odds for no-hike in October may have fallen sharply on Wednesday, it is still the most likely decision according to Polymarket traders, who are giving it a 63% chance.

In addition, rising inflation will not be the only factor in play when the Fed makes its decision in two weeks' time.

They will be looking at the September jobs data, announced earlier this month, which fell significantly to 29k, down from 162k in August. The unemployment rate also increased to 4.2%, up from 4.1%.

And recently, the stock market has started to feel the effects of rising yields, which will likely go higher if the Fed announces another hike in October. 

Then there is the history. The Fed traditionally holds rates steady 67% of the time in October when there is a general election. 

Therefore, even with the higher-than-expected September CPI, a no-change decision seems the more likely one, and Polymarket traders still favor that outcome.