The Fed Restarted Rate Hikes. Will October Bring a Second?

Five days ago the Federal Reserve did something it had not done since 2023. It raised interest rates. The quarter-point move on September 16 lifted the target range to 3.75% to 4%, closing a fifteen-month easing cycle and opening a tightening one, and the projections released alongside it pointed to one more increase before the year is out. The question now dividing traders is whether that increase lands at the next meeting, on October 27 and 28, or waits. The futures market is close to a coin flip. CME’s FedWatch tool put the odds of an October hike near 53% on Monday, which is another way of saying the market does not yet know.

“No ambiguity” if demand is the driver

The case for moving again grew louder on Monday, from an unlikely source. Chicago Fed President Austan Goolsbee, long among the committee’s more patient voices, warned that this year’s inflation may be coming from strong demand rather than supply bottlenecks alone. If that is the story, he said, the rate response should be “more aggressive and more front-loaded,” and there would be “no ambiguity” about how the Fed would react. His specific worry is the artificial-intelligence buildout. Data centers pull hard on construction labor, electricity, equipment and financing, and spending that fast can outrun what the economy is able to supply. Markets have leaned into the hawkish read. Gold slipped as traders raised their bets on a hike, and the dollar firmed. The committee’s own September projections back the direction, penciling in a range of 4% to 4.25% by the end of the year. A Fed that has just started hiking, and expects to hike again, has already cleared the bar for October in its own forecast.

The oil shock is deflating

The counterargument is being written in the oil market. Crude fell for a fourth straight session on Monday, with Brent sliding toward $102 and West Texas Intermediate dropping below $100 for the first time in weeks. Brent had traded above $108 during the worst of the U.S.-Iran conflict. It is now set for its longest losing streak since June. The relief is coming from diplomacy and logistics. President Trump signaled he might meet Iran’s president at the United Nations this week, and shipping through the Strait of Hormuz has improved, with Saudi Arabia restoring throughput to 2.8 million barrels a day after August’s disruptions. Energy has been the largest supply-side push behind this year’s inflation, and it is fading in real time. The demand picture looks softer too. The Chicago Fed’s National Activity Index slipped to negative 0.04 in August from a revised positive 0.08 in July, with its production component turning negative, a sign that growth was cooling as the quarter closed. And Goolsbee framed his own warning as conditional. The demand-versus-supply diagnosis is not settled, and a central bank that has spent much of this cycle looking through supply shocks has room to wait for cleaner evidence.

What the data shows

The tape is not behaving like a market braced for tighter money. Stocks rose into the weekend. The S&P 500 closed Friday at 7,730.01, up 1.04% on the day; the Nasdaq gained 1.6% to 26,945.63 and the Dow added 0.41% to 51,896.74. The Cboe Volatility Index sat at 14.74, a level that reads as calm. The 10-year Treasury yield eased to 4.94%, high by the standards of the past year but lower on the session. Under the surface, the leadership fit the AI-demand story. Technology led Friday’s sectors, up 0.82%, while the defensive corners lagged, consumer staples down 0.83% and real estate off 0.95%. Falling oil did little for energy shares, which slipped 0.26%. The numbers describe an equity market pricing calm even as the rate debate sharpens.

What would settle it

The next two weeks are dense with tests. A run of Fed officials speaks through the week, from New York’s John Williams to Richmond’s Thomas Barkin, and how they weigh the demand question will matter more than any single figure. Thursday brings the flash purchasing-managers surveys, an early read on September activity, and jobless claims land the same day. Durable-goods orders follow on Friday. Then there is the oil tape itself. Another leg lower would drain more of the inflation impulse, while a breakdown in the Iran talks could put the risk premium back. All of it feeds into the decision on October 27 and 28, where the split finally gets resolved. Until then, a 53% probability is the honest summary. The market is watching the same evidence the Fed is, and reading it both ways.

This is a general-market summary for information only — not investment advice, and not a recommendation regarding any security.