Hold Now, Watch the Math: What Two Key Fed Gauges Are Saying

• NY Fed near-term inflation expectations rose in September.

• The Atlanta Fed’s wage growth gauge is still outpacing inflation growth.

• CPI could start falling sharply in March.

The Fed is worried about inflation. Just not worried enough to move in October.

The Federal Reserve's hawks and centrists don't agree on much these days. But on this, the past few weeks of Fed-speak line up neatly heading into the October 28 monetary policy meeting.

The funny thing is, Wall Street only seems to have half-noticed. Its rate outlook has turned more hawkish since mid-September, just not for October. The day after the Fed's quarter-point hike on September 16, futures priced one more move in December and then a long pause, with the midpoint of the fed funds range parked near 4.125% through mid-2027.

Today, the near-term path hasn't budged. Traders still see the Fed sitting out October and hiking in December. What's changed is the back end. The market now prices two more hikes in the first half of 2027: one by March and another by June. That lifts the expected midpoint to roughly 4.625%.

My take? Wall Street is getting ahead of itself, as usual. Speculators have a habit of stretching today's headlines too far into the future. Pricing two extra hikes by next June is a big bet on inflation that should cool on its own. Headline CPI may run hotter into year-end. But starting in March, we lap this past spring's price spike. As those gains roll out of the year-over-year math, inflation should fall sharply -- and rate hike bets should drift lower with it. That should underpin a steady rally in the S&P 500 Index.

But don't take my word for it, let's look at what the data's telling us...

Start with the people setting rates. Two weeks after the Fed lifted its benchmark rate to a range of 3.75% to 4%, New York Fed President John Williams said there was "no need for urgency." Two days later, Vice Chair Philip Jefferson said the Fed may need more time before its next move. He flagged upside inflation risks and warned that sticky prices could spill into inflation expectations.

Governor Christopher Waller backed a hold ahead of last month's meeting, as long as inflation kept improving. Even Cleveland Fed President Beth Hammack, the committee's top hawk, has stopped short of calling for another hike. Then September payrolls rose just 29,000, and the odds of an October hold jumped to about 77%.

So, the Fed has room to wait. How long it can wait comes down to two gauges policymakers watch closely… and one piece of math most investors are missing.

What Consumers Expect

First, the New York Fed's Survey of Consumer Expectations. Households now see prices rising 3.9% over the next year, up from 3.6%. The three-year outlook ticked up to 3.3%, and the five-year held at 3.0%.

Here's the twist. The short end is moving, but the long end isn't. Consumers feel the pinch, but they still trust the Fed.

That's the line to watch. If expectations keep climbing, the Fed will worry that households will start hoarding goods now in anticipation of higher prices later. That extra demand pushes prices up even more, and the fear becomes a self-fulfilling prophecy. It's exactly what Jefferson warned about. In 2021 and 2022, the one-year spiked toward 7% and the three-year topped 4%. Today isn't close - yet.

What Paychecks Are Doing

Second, wages versus inflation. The Atlanta Fed's Wage Growth Tracker rose 4.1% from a year earlier in August, while CPI rose 3.4%. Paychecks were winning by about 70 basis points.

Here's why that gap matters. Look at 2021 through early 2023. Prices outran paychecks for about two years, and households couldn't keep up. That's when the Fed stepped in hard, hiking aggressively to cool demand. A sustained slip like that is the second thing to watch.

Earlier this year, CPI briefly topped 4% and passed wage growth again. Then inflation cooled, and wages pulled back in front. The tracker declined to 3.9% in September, easing that gap over inflation growth to 50 basis points.

The Math That Matters

Now for the part most people miss. On an unadjusted basis, consumer prices jumped 1.0% in March, 0.9% in April, and 0.6% in May. Next spring, those months drop out of the year-over-year math. The catch? Last fall's flat-to-negative months roll off first. If prices rise a steady 0.3% a month, headline inflation could climb above 4% by year-end and still sit near 4.4% in February. Don't panic when it does, because that's math, not a new inflation wave. Then the spring months fall away, and the annual rate drops to roughly 2.7% by May.

What matters most to the Fed is the monthly pace underneath. At 0.3% a month, inflation still compounds to about 3.6% a year once the base effects wash out. Anything weaker gets price growth back closer to target.

The Payoff

For now, the situation looks OK. Long-term expectations are anchored. Wages are ahead of prices without running hot. That's the backdrop for a Fed on hold, not a long string of rate hikes.

So, I'll be watching three things. First, whether short-term expectations bleed into the longer-term readings. Second, whether paychecks slip behind prices for more than a few months. And third, whether that monthly pace cools heading into next spring. Right now, expectations are flashing yellow. Nothing is red. And once that spring spike rolls off, I expect Wall Street to walk back those 2027 hikes. Steady rates, growing paychecks and fading rate fears. That's a recipe for a steady grind higher in the S&P 500.

Five Stories Moving the Market:

SpaceX struck a deal to acquire ‌a nationwide low-band spectrum portfolio, moving Elon Musk's satellite venture closer to mounting a direct, orbital challenge to legacy wireless giants across the United States – Reuters. (Why you should care - by ⁠pairing nationwide low-band airwaves with high-frequency space capacity, SpaceX is positioning Starlink Mobile to bypass conventional cell towers entirely and ​challenge the wireless carriers on both broad coverage and in-building reliability

Lumentum’s optoelectronic parts are “completely sold out” through almost 2029 on demand from tech companies clamoring for faster AI data centers; the company, which received an investment of $2 billion from Nvidia earlier this year along with rival Coherent, supplies advanced indium phosphide devices that help enable high-speed cloud computing and data transmission – Bloomberg. (Why you should care – the company said it’s unable to meet demand for about 70% of its products through the end of next year)

St. Louis Federal Reserve President ​Alberto Musalem said the U.S. central bank will need to hike interest rates again to bring inflation back to ‌its 2% target, although he declined to say what policymakers should do at their meeting later this month – Reuters. (Why you should care – Musalem, a monetary policy hawk, is not a voter on the rate-setting FOMC this year, so his opinion holds less sway)

The AI investment boom is driving an expansion in global goods trade volumes at a pace last seen during the period of rapid globalization that was ended by the global financial crisis, according to new forecasts released by the World Trade Organization - WSJ. (Why you should care – the boom is helping to offset higher costs driven by the Iran conflict)

European Commission finance chief Valdis Dombrovskis urged euro-area member states to observe budgetary restraint, pushing back against a proposal from Italy and Greece to introduce additional leeway – Bloomberg. (Why you should care – EU officials are increasingly worried that

Economic Calendar:

Earnings: DAL

Markets in South Korea are Closed

Japan - Machine Tool Orders for September (2 a.m.)

Switzerland - SECO Consumer Climate for September (3 a.m.)

Eurozone - ECOFIN Meetings (6 a.m.)

Canada - Employment Change and Unemployment Rate for September (8:30 a.m.)

ECB's Schnabel (Executive Board Member) Speaks (9:30 a.m.)

Fed's Schmid (Kansas City, Non-Voter) Speaks (9:30 a.m.)

U.S. - University of Michigan Consumer Sentiment for October (10 a.m.)

U.S. - Baker Hughes Rig Count (1 p.m.)

U.S. - CFTC's Commitment of Traders Report (3:30 p.m.)

Fed's Collins (Boston, Non-Voter) Speaks (4 p.m.)

Fed Releases Balance Sheet Updates on Commercial Banks (4:15 p.m.)