2026-09-30

PCE Inflation Cools, Fed October Hike Odds Plunge From 70% to 37% - Nasdaq Jumps 1%, S&P 500 Erases September Loss

Written & reviewed by the TradeSmrt editorial team · 2026-09-30

In this article

What Happened
Why One Inflation Report Moved the Entire Market
What to Take Away From This
FAQ
Sources

What Happened

On Wednesday, September 30, the Commerce Department's August Personal Consumption Expenditures (PCE) price index - the Federal Reserve's preferred inflation gauge - came in noticeably cooler than Wall Street expected. Core PCE, which strips out volatile food and energy prices, rose 3.0% year over year, well below the 3.3% consensus forecast and down a full notch from July's 3.3% reading. Headline PCE rose 3.4% annually, also below the 3.7% forecast, with month-over-month gains of just 0.3% for the headline figure and 0.2% for core. Personal spending, meanwhile, still climbed 0.9% month over month, a combination economists described as inflation cooling without demand cracking.

That single data point was enough to flip the mood across both bond and stock markets almost overnight. As this outlet reported on September 27, odds of an October 27-28 FOMC rate hike, tracked by the CME FedWatch tool, had rocketed from 53% to the 70% range in just four days. After Wednesday's PCE release, those odds collapsed back down to roughly 35-40%, settling near 37% on CME FedWatch - nearly cut in half in under a week. Attention has now shifted to the December meeting instead: while October odds fell sharply, the probability of at least one hike by year-end still sits near 90%, suggesting traders see this less as "no more hikes" and more as "the hike got pushed from October to December."

Equity markets treated the news as a clear relief rally. The Nasdaq Composite gained 280.46 points, or 1.05%, to close at 27,078.00, while the S&P 500 rose 50.80 points, or 0.66%, to 7,721.64. The Dow Jones Industrial Average added 93.10 points, or 0.18%, to finish at 51,443.02. Notably, the S&P 500's gain was enough to erase most of its losses for the month, flipping September back into positive territory on a monthly basis. Treasury yields fell across the curve as the lower hike odds took pressure off the bond market, and rate-sensitive large-cap technology and semiconductor names led the day's advance.

Why One Inflation Report Moved the Entire Market

This episode is a clean illustration of a broader point: the Fed's next move isn't a fixed destination, it's a probability that gets recalculated with every new data point. Just days earlier, hawkish comments from Fed Governor Michael Barr and a stronger-than-expected PMI reading had pushed hike odds from 53% to the 70s. This week, a single inflation report reversed nearly half of that move in the opposite direction. Because the Fed operates under a "data-dependent" framework - weighing incoming inflation, employment, and spending figures rather than committing to a preset path - rate-hike probabilities priced into futures markets can swing by dozens of percentage points within days when the data surprises in either direction.

The mechanics are straightforward once you unpack them. Fed funds futures markets price in real time what traders expect the Fed to do at upcoming meetings, based on collective bets. A core PCE reading 0.3 percentage points below forecast signals that the urgency for additional rate hikes to tame inflation has diminished. What made this particular report notable is that both headline and core measures cooled together - core PCE strips out the volatile food and energy components specifically so that a decline there reads as a more durable, underlying trend rather than a one-off swing in gas or grocery prices. Meanwhile, the fact that personal spending still rose 0.9% suggests inflation is moderating without the economy stalling out, a combination consistent with the "soft landing" scenario markets have been hoping for since the Fed's tightening cycle began.

The outsized reaction in the Nasdaq relative to the Dow is also worth examining. Large-cap technology stocks are disproportionately sensitive to the discount rate used to value future earnings - when long-term Treasury yields fall, that discount rate drops, and the present value of a company's future profits rises even if nothing about the underlying business has changed. That's why growth and technology stocks tend to outperform value and rate-sensitive sectors whenever yields fall meaningfully, and Wednesday's session followed the same pattern: the Nasdaq's 1.05% gain dwarfed the Dow's 0.18% advance.

Still, it would be premature to read this single data point as the end of the Fed's tightening cycle. The fact that year-end hike odds remain near 90% indicates markets aren't pricing out a hike altogether - they're simply repricing its timing from October to December. What happens next depends heavily on the remaining data on the calendar: the September jobs report due October 2, and the September Consumer Price Index due later in October. Either could push hike odds back up again, and the kind of double-digit percentage-point swings seen over the past week are likely to keep recurring as each new release lands.

What to Take Away From This

A "70% probability" headline is not a locked-in outcome. Odds that sat at 70% just four days earlier fell to 37% on a single data release, a reminder that rate-futures-implied probabilities are recalculated continuously, not fixed forecasts.
Watch both headline and core inflation together. When core PCE - which strips out volatile food and energy prices - cools alongside the headline number, markets tend to treat it as a more durable signal than a one-off swing driven by a single category.
Falling yields tend to lift growth and tech stocks disproportionately. Assets valued heavily on future earnings are more sensitive to discount-rate changes, which is why the Nasdaq's 1.05% gain outpaced the Dow's 0.18% move on the same day's news.
"Lower hike odds" and "end of tightening" are not the same thing. With year-end hike probability still near 90%, this rally is better read as a shift in expected timing - from October to December - rather than a signal that the Fed is done raising rates.

FAQ

Why does the PCE index get more attention than the CPI report?

PCE is the inflation gauge the Fed officially references when setting its 2% annual inflation target. It's designed to capture a broader range of actual consumer spending patterns than CPI, which is one reason Fed officials and policymakers tend to cite it first in their public remarks and policy discussions.

Does a 37% October hike probability mean there won't be a hike at all?

Not necessarily. While the probability of a hike specifically at the October meeting fell sharply, the probability of at least one hike by year-end remains close to 90%. Markets appear to be betting less that hikes are off the table and more that the timing has shifted from October to December.

If inflation is cooling, why did consumer spending still rise?

Cooling inflation alongside rising spending is consistent with a "soft landing" scenario - price pressures easing while households' real purchasing power holds up enough that spending doesn't pull back. For the Fed, that combination offers some reassurance that taming inflation doesn't necessarily require slowing the economy sharply.

Did this rally fully reverse September's stock market losses?

The S&P 500's Wednesday gain was enough to erase most of the index's losses for the month and turn September positive overall. However, the recovery wasn't even across sectors - financials, which had been hit hardest by the earlier surge in long-term Treasury yields, do not appear to have fully recovered their September losses from this single report alone.

Sources

This article is an original synthesis and analysis based on the reporting below, not a reproduction of the original articles. Please verify the latest figures and details directly with the source reporting.

⚠️ This article is for informational purposes only and does not constitute investment advice. Market conditions change constantly - always verify the latest information before making investment decisions.