RatesMarket noteThursday 1 October 2026, 22:40
Softer inflation cut the odds of an October Fed rise to about a third
Core PCE prices rose 0.2% in August, less than forecast, and revisions lowered the path. Futures now give an October increase about a 35% chance, down from 71% on Monday.
By The Notebook Desk
Prices in the US rose a little less than expected in August, and markets took it as a reason for the Federal Reserve to wait. The core PCE price index, which leaves out food and energy and is the Fed’s preferred gauge, rose 0.2% on the month and 3.0% on the year. Forecasters had expected a monthly rise of 0.3%. The headline index rose 0.3% on the month and 3.4% on the year.
Futures were already moving. On Tuesday, after a speech by John Williams of the New York Fed, CME futures put the chance of a quarter-point rise at the Fed’s meeting on 28 October at about 50%, down from about 70% earlier in the week. After the data, they put it at about 35%, Yahoo Finance reported. On 28 September CME FedWatch had it at 70.9%, as we reported after the Fed’s first increase since 2023.
Revisions did much of the work
The August figures came with the annual update of the national accounts, which revised the data back to 2021. The changes lowered inflation. Core inflation in the year to July is now 3.0%. The first estimate was 3.3%.
Most of the change came from new methods for three items: computer software, legal fees and investment advice. Stephen Brown of Capital Economics estimated that they took 0.3 points off core inflation. “Core price pressures are slightly less firm than feared,” he said.
The revised series, published on FRED, shows core inflation flat at about 3% since June, after a peak of 3.2% in May. Over the three months to August, core prices rose at an annualised rate of about 2%, the Fed’s target.
Spending is strong, income is not
The same report showed how firm demand is. Spending rose 0.9% in August, or 0.6% after inflation. Real disposable income, what households have left after tax and price rises, did not grow at all. People spent more by saving less: the saving rate fell to 4.1% of income from 4.6% in July, its lowest since November 2022.
That mix argues both ways. Strong spending keeps pressure on prices. A falling saving rate cannot carry spending for long if incomes do not keep up.
Bonds: a 24-year high, then a turn
The 10-year Treasury yield closed at 5.29% on Wednesday, its highest close since May 2002. On Thursday it touched about 5.34% in the morning, then turned, CNBC reported, and it closed at 5.24%, according to Treasury’s daily rates.
The 2-year yield, which tracks expectations for the Fed, fell 10 basis points on Thursday to 4.78%. That is the market taking an October increase out of prices. “Softer PCE, a few bits of dovish Fed speak and potentially some positioning ahead of tomorrow’s jobs data” all played a part, said Ross Mayfield of Baird. The S&P 500 rose 0.2% to 7,666.45.
The Fed is in no hurry
Officials had prepared the ground. On Tuesday Williams said “We have time to gather more information”, and that he expects one more increase “late this year”. On Thursday Philip Jefferson, the Fed’s vice-chair, said officials would need to come to their own judgment, “which may take more time”.
Not everyone is reassured. Michael Barr, a Fed governor, said on Tuesday that he had seen only two months of data consistent with 2% core inflation in the past 20 months. “I don’t yet see a clear trend toward a timely return to 2%,” he said. Oil is the other risk. US crude settled 2.7% higher at $92.87 a barrel on Thursday as traders waited for President Trump’s next move in the Iran conflict.
What to watch
| Date | Release | Why it matters |
|---|---|---|
| Fri 2 Oct | US jobs report for September | A weak number would make an October pause more likely |
| 27–28 Oct | Fed meeting | Futures now lean towards no change |
| 29 Oct | PCE prices for September | The first reading after the revisions |
| 8–9 Dec | Fed meeting, with new projections | Where Williams’s “late this year” points |
Disclosure
This is analysis and opinion, not investment advice.