Softer U.S. inflation lowers expectations for another Fed rate hike

A softer-than-expected U.S. inflation reading reduced market expectations that the Federal Reserve would raise interest rates again in October, after the central bank increased rates earlier in September for the first time since 2023.

The personal consumption expenditures price index rose 3.4% in August from a year earlier, below the 3.7% forecast by economists polled by Reuters, according to a Commerce Department report cited by The Guardian. Traders subsequently put the probability of an October rate increase at about 35%, down from roughly 45%, based on LSEG data.

Separate figures showed solid second-quarter U.S. economic growth, supported by consumer spending and business investment associated with artificial-intelligence infrastructure. Payroll processor ADP reported that private employers added 90,000 jobs in September, up from 36,000 in August and above expectations.

U.S. stock indexes initially rose Wednesday, although the S&P 500 closed 0.25% lower and the Dow declined 0.86%. The Nasdaq gained 0.24%. The 10-year Treasury yield held at 5.246%, one day after reaching its highest level since June 2007.

Investors were awaiting the Labor Department’s monthly employment report, expected to show that the economy added 84,000 jobs in September, compared with 162,000 the previous month.