Fed Governor Signals Possible October Rate Hike as Inflation Accelerates

Federal Reserve Governor Michael Barr told a housing conference in Chicago that policymakers may still need to tighten monetary policy to bring inflation back to target, despite last week’s 0.25 percentage-point rate rise. He said further adjustments are "likely to be needed to ensure inflation comes down to target in a timely fashion" and emphasized the importance of price stability for sustainable growth and maximum employment.

On the same day, S&P Global’s flash purchasing managers' indexes showed the services index at 58.7 and the manufacturing index at 56.7, the highest levels in 59 and 53 months respectively, pushing the composite index to a 62-month high of 58.4. Both indexes indicate expansion above the neutral 50 mark.

The firm’s inflation gauge also rose to its strongest level since October 2022, driven by higher fuel, transportation costs and rising wages. Chris Williamson, chief business economist at S&P Market Intelligence, noted that input costs jumped in September at the steepest rate in four years, adding upward pressure on selling prices.

Employment data from the PMI surveys showed robust job growth, with service-sector hiring expanding at its fastest pace since June 2002 and manufacturing hiring at its strongest since February 2021. Companies reported needing more workers to clear order backlogs.

Market participants responded sharply. The CME FedWatch tool raised the probability of a rate hike at the Federal Open Market Committee meeting on Oct. 27-28 to 73%. Treasury yields also climbed, with the two-year note rising more than 13 basis points to 4.9%.