Investors have increased their bets that the US Federal Reserve will hold interest rates steady in October, after the release of the Personal Consumption Expenditures price index came in below expectations, easing investors' concerns about inflation. The latest FedWatch Tool from CME Group indicates that investors now assign a 62.9% probability to the Fed holding rates at 3.75-4.00% at its October meeting, up from just 49.1% yesterday. Meanwhile, investors assign a 37.1% probability to the Fed raising rates by 0.25% to 4.00-4.25%, down from as much as 50.9% yesterday. The US Commerce Department reported that the headline PCE index, which includes food and energy categories, rose 3.4% in August from a year earlier, below analysts' forecast of 3.7%, and rose 0.3% month on month, below the expected 0.4%. The core PCE index, which excludes food and energy and is the inflation gauge the Fed watches most closely, rose 3.0% year on year, below the expected 3.3%, and rose 0.2% month on month, below the expected 0.3%.
Below-forecast PCE inflation raises the odds the Fed holds rates steady in October, lowering the expected path of the effective fed funds rate.
Cooler-than-expected PCE inflation boosts bets on the Fed holding rates, pulling the 10-year Treasury yield lower.
