Markets Cheer Cooling Fed Rate Hike Bets as FOMC Minutes Loom

The S&P 500 set records, gold tried to bottom, and the dollar slipped as Fed rate hike bets cooled. Minutes from last month’s Fed meeting are in focus next.

• The S&P 500 and Nasdaq 100 hit record highs, but the small-cap Russell 2000 stayed stuck in its downtrend
• Markets see an 81% chance the Fed holds in October yet still price one more hike in December and another two in 2027
• Minutes from the Fed’s September meeting may show why officials see little need to tighten further

The S&P 500 pushed to a record high, following the tech-heavy Nasdaq 100, which broke out a day earlier and kept climbing. The risk-on mood also spilled into markets that have been weighed down by worries about rising interest rates.

Gold, which found a floor earlier than most over the past several days, held its ground and may be trying to build a base. Silver tried to carve out a bottom of its own, and Bitcoin stayed within reach of its late-September high. The US dollar weakened broadly. The Australian and Canadian dollars gained, and even the euro rose despite student protests in Paris that might have amplified recent pressure on local bond markets. Instead, the yield spread between French and German 10-year government debt narrowed, and European stocks rose too.

The small-cap Russell 2000 was the exception. It was turned back at a former support level and remains in the downtrend that took hold as rate hike bets built after Fed Chair Kevin Warsh’s hawkish turn at the Jackson Hole symposium in August. For the most rate-sensitive corner of the stock market, higher yields still seem to matter.

Markets still expect more rate hikes than the Fed does

Fed funds futures now put the odds of no change in October at almost 81%, while a 25-basis-point (bps) hike by December is priced at nearly 98%. That much matches the projections the Fed published in September, which showed two hikes this year with strong consensus among officials. The disagreement is about 2027. Markets price another hike by March and a second by June or July. The Fed sees rates on hold next year, followed by cuts. That leaves traders and policymakers about 50bps apart.

The Fed’s dot plot suggests its view is widely shared. The consensus for a standstill in 2027 is overwhelming, with only four policymakers projecting lower rates and none projecting higher. In the years that follow, most officials see rates coming down.

There is a case for patience. Three-month annualized inflation in the personal consumption expenditures (PCE) price index, the Fed’s preferred gauge, has fallen to the 2% target after peaking in May. The smoother six-month rate has been easing since June. Year-on-year inflation is still well above target, but near-term momentum has turned. Meanwhile, the Atlanta Fed’s GDPNow model has trended lower as new data arrived over the past two months, down from 5-6% in August to 3.7% now.

Is the Fed being cautious, or does it see the economy turning?

Minutes from the September meeting, due Wednesday, will likely make the case for just one more hike. What may matter more is the reasoning. The policy statement described economic activity as expanding at a solid pace while noting that uncertainty remains elevated, citing geopolitical developments among other factors. If officials want to stop because they are wary of overcommitting amid that uncertainty, that is one message. If they see the economy shifting into a more disinflationary state, that is a weightier one.

A message closer to the latter could force markets to reprice the extra tightening they still expect for 2027. That would point toward gains for gold, silver, and Treasury bonds, which have pointedly stopped falling even at the long end of the yield curve. With traders and the Fed this far apart, the minutes carry real potential for surprise, and with it, volatility across markets.

Ilya Spivak, tastylive Head of Global Macro, has over 15 years of experience in trading strategy. He specializes in identifying thematic moves in currencies, commodities, interest rates and equities. He hosts Macro Money and co-hosts Overtime, Monday-Thursday. @Ilyaspivak

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