I. The Fed: To Hike or Not To Hike?
The Federal Reserve announces its next interest-rate decision on Wednesday, October 28. According to CME FedWatch, the federal funds futures market assigns an 84% probability to a pause. The market expects a 25bps hike in December and roughly 50bps of tightening over the next six months (chart).
The two-year Treasury yield remains roughly 90bps above the federal funds rate, consistent with expectations for further tightening (chart).
Why are markets pricing in such a low probability of an October hike despite September's hot CPI and PPI reports? The explanation may lie more in Fed commentary than in the economic data:
