What do markets expect for US interest rates in October after weak jobs report?

Investors now see very little chance that the Federal Reserve will raise interest rates again in October following a weaker-than-expected September employment report.

The CME FedWatch Tool, which is based on trading in 30-day interest rate futures, shows just a 17% probability that the Federal Reserve will raise rates by a quarter percentage point. The probability was close to 36% a week ago.

On prediction market platform Kalshi, the probability of an October rate hike stands at just 18%, down from around 70% a week ago.

The US economy added only 29,000 jobs in September, well below expectations for an increase of more than 80,000. The weakness in the labor market could prompt the Federal Reserve to reassess how it balances its dual mandate of maximum employment and price stability after raising interest rates at its September meeting to combat inflation that has remained above target for five years.

The probability of an October rate hike had already declined in the middle of this week following Wednesday’s release of the Personal Consumption Expenditures Price Index, the Federal Reserve’s preferred inflation gauge, which showed prices rising at a slower-than-expected pace.

Core prices, which exclude food and energy, rose 3% in August, below the consensus forecast of 3.3%.

“This report reinforces the need for the Federal Reserve to be patient. The labor market has not deteriorated sharply, but there is also limited evidence of a meaningful improvement, giving policymakers reason to wait for more data,” said Adam Schickling, senior economist at Vanguard.

December rate hike expectations

While traders now see an October rate hike as unlikely, they still expect the central bank to raise interest rates in December.

The probability of a December rate hike exceeds 75%, according to the CME FedWatch Tool, while Kalshi puts the probability at 65%.

The Federal Reserve is scheduled to announce its next interest rate decision at the conclusion of a two-day monetary policy meeting ending on October 28.

David Doyle, head of economics at Macquarie, said the data contained encouraging signals despite the relatively weak headline figure. He pointed to the rise in the labor force participation rate, alongside job gains in cyclical sectors such as construction and manufacturing.

“The labor market remains fundamentally healthy,” Doyle said.

After the rapid deterioration in labor market strength during 2024 and 2025, Preston Caldwell, chief US economist at Morningstar, described the September report as evidence that concerns about further deterioration are easing.

Against that backdrop, Caldwell said the Federal Reserve will turn to other economic data to guide its interest rate decisions over the coming months.

September’s job gains were driven by construction, manufacturing and healthcare, while the government and financial services sectors lost jobs.

“I don’t think this represents the beginning of a sustained rise in the unemployment rate,” Macquarie’s Doyle said, adding that a broader measure of unemployment edged lower in September.

October rate-hike expectations decline

Analysts said the slowdown in September job growth is likely to reduce the chances of a Federal Reserve rate hike in October. Stable employment conditions give policymakers greater room to leave interest rates unchanged without worrying about the economy overheating.

“Today’s weak jobs report shows that the labor market is simmering, not boiling,” Jeff Schulze, chief investment strategist at the Franklin Templeton Institute, wrote on Friday.

“With the revised inflation data coming in somewhat more moderate, the Federal Reserve may decide to pause in October,” Morningstar’s Caldwell said, adding that one interest rate hike before the end of the year remains likely.

Macquarie’s Doyle also expects the Federal Reserve to wait until December before raising interest rates again.

“The evidence supports the view that underlying inflation... is moving in the right direction,” he said.

Interest rate futures currently price in an 18% probability of an October rate hike, according to the CME FedWatch Tool, down from 24% on Thursday and 64% a week earlier.