Rising inflation pressures and an expanding US economy are increasing expectations that the Federal Reserve will raise interest rates again in late October, ahead of critical national elections. On Wednesday, traders significantly increased bets on a second consecutive policy tightening, reflecting concerns about persistent inflation and robust economic activity.
Data released Wednesday showed the S&P Global flash US Composite PMI Output Index reaching its highest level since July 2021, indicating strengthening business activity. Simultaneously, the survey revealed that prices paid by companies for inputs surged to a near four-year peak, signaling growing cost pressures within the supply chain.
Energy prices have also contributed to inflationary risks. Brent crude futures rose around 2% to just above $101 a barrel, while diesel fuel prices exceeded $6.50 per gallon on average. The ongoing conflict between the US and Iran has disrupted supply chains, exacerbating price pressures. Diesel, in particular, poses broader inflation risks as it powers much of the equipment and freight transportation necessary for economic operations.
Federal Reserve Governor Michael Barr, speaking at a Chicago Fed housing affordability conference on Wednesday, acknowledged the elevated inflation risks and anticipated further policy tightening. “Risks to achieving our inflation target have increased, while risks to the labour market have receded,” Barr said, noting that additional adjustments are likely necessary to bring inflation back to target levels promptly. While he did not specify a timeline, his remarks suggested the possibility of at least two more rate hikes.
Last week, the Fed unanimously raised its benchmark interest rate by a quarter percentage point to a range of 3.75% to 4%. Most policymakers—16 of 18—signaled that at least one more rate increase would probably be needed before the year's end. Fed Chairman Kevin Warsh described last week’s move as removing “a dose of accommodation” but declined to comment on the likelihood of further hikes.
Following the economic data release, US Treasury yields rose sharply. The 10-year yield climbed above 5%, reaching levels not seen since 2007. The auction for five-year Treasury notes experienced unusually weak demand, pushing yields to a 19-year high. Short-term US interest rate futures priced in about a 70% probability of another Fed rate increase at the forthcoming October meeting, up from around 55% earlier in the session.
The potential for consecutive rate hikes comes amid heightened political tensions as the Republican Party prepares to defend narrow majorities in both chambers of Congress during the November 3 elections. Rising borrowing costs and affordability concerns—highlighted by a recent report showing the average 30-year fixed mortgage rate hitting 7.12%, a two-year high—remain a prominent issue for voters.
President Donald Trump has criticized the Fed’s rate increases as political decisions, while proposing measures such as ending the Iran conflict post-election and banning US diesel exports to alleviate inflationary pressures. Analysts note that inflation is partly driven by administration policies, including tariff increases and geopolitical conflicts, complicating the Fed’s efforts to balance price stability with sustainable economic growth.