A key gauge of underlying inflation is flashing hotter than expected, strengthening the case that the Federal Reserve will hold its policy rate steady at its October meeting. The Cleveland Fed’s median CPI annualized monthly percentage change climbed to 2.81 for September, up significantly from 2.10 in August, according to data released on October 22. This acceleration suggests that inflationary pressures remain sticky, making a rate cut unlikely in the near term.
This shift in the inflation outlook has been priced into the markets. The current implied probability of the Fed maintaining its current rate stands at approximately 91%, according to the Kalshi seat feed. This high probability is bolstered by the fact that the market has already largely priced in a 'no change' outcome, with the inflation data serving as a confirmation rather than a surprise.
The data also introduces a slight risk of a rate hike. The acceleration in the Cleveland Fed’s core CPI measure has increased the probability of a hike to around 7%, a tail risk that provides additional convexity support for the no-change outcome. As inflation data reduces the odds of a cut to zero, the market is increasingly focused on the possibility of a hold.
Source: Kalshi seatfeed s7, a real-time market data feed for Fed decision contracts
What would change this read
A significant deterioration in the labor market or a sudden financial stress event prior to the October 28th decision could override the current inflation narrative. Such a development might force the Fed to prioritize economic stability over inflation control, potentially pushing the probability of a rate cut higher and undermining the current 'no change' consensus.
