Interest-rate expectations can change faster than the economic data that created them. In barely a week, traders cut the perceived chance of an October Federal Reserve rate hike from nearly 71% to about 20%, a dramatic reversal after softer U.S. employment numbers and more patient signals from senior Fed officials. Canada is being pulled into the same repricing. Expectations for an October Bank of Canada increase have also retreated, even though markets still see another Canadian hike as plausible before year-end.
The shift matters because neither central bank has declared inflation beaten. Instead, investors are reassessing timing: whether policymakers need to tighten immediately, later in the year, or not at all if growth and hiring weaken further. That distinction is already moving bonds, equities and borrowing-rate expectations on both sides of the border.
A Week That Repriced the Fed
The most striking move is the speed of the repricing. CME FedWatch-based market pricing showed the probability of a Federal Reserve hike at the late-October meeting falling to about 20% on October 5, from nearly 71% a week earlier. That is a drop of roughly 51 percentage points in days, not months. It came only weeks after the Fed raised its target range by 25 basis points to 3.75%–4.00% on September 16, its first increase in three years. In other words, markets went from expecting a strong chance of back-to-back hikes to treating an October pause as the overwhelmingly more likely outcome.
That reversal should not be mistaken for a broad turn toward easier monetary policy. The Fed’s September projections still pointed to a year-end federal funds rate around 4.1% at the median, a level consistent with another quarter-point increase from the current midpoint. The repricing is therefore mostly about timing and confidence. Traders are saying the case for moving again in October has weakened sharply, not that inflation risks have disappeared. That distinction is important for households and investors because a delayed hike can still leave borrowing costs elevated for longer, especially if a December increase remains the central scenario.
The Jobs Report Broke the October Case
The September U.S. employment report supplied the clearest reason for traders to back away from an October hike. Employers added just 29,000 nonfarm jobs, far below the roughly 90,000 economists surveyed by Reuters had expected. The unemployment rate edged up to 4.2%, and revisions made the prior months look weaker as well: July was revised from a gain of 21,000 jobs to a loss of 10,000, while August was revised down from 162,000 to 133,000. Those numbers do not describe a collapsing labour market, but they do undermine the argument that the Fed must tighten again immediately.
Wage data reinforced the message of cooling rather than overheating. Average hourly earnings rose only 0.1% in September and were up 3.0% from a year earlier. That matters because central bankers watch wages for signs that inflation could become self-reinforcing through stronger labour costs and consumer demand. The latest report instead gave the Fed more room to wait and observe. For a policymaker trying to balance inflation against employment, a modest payroll gain, softer revisions and slower wage growth make the cost of moving too aggressively more visible. Markets reacted accordingly, cutting October hike odds to less than one in five after the report.
Fed Officials Had Already Started Applying the Brakes
The jobs report accelerated a shift that senior Fed officials had already begun. New York Fed President John Williams said on September 29 that, after the September increase, there was “no need for urgency” and that policymakers had time to gather more information. He still said one further upward adjustment could be appropriate later in the year if the economy evolved as expected. Two days later, Federal Reserve Vice Chair Philip Jefferson delivered a similarly cautious message, arguing that future changes should depend on the data, the outlook and the balance of risks rather than on a preset schedule.
Those comments mattered because Williams and Jefferson sit near the centre of the Fed’s policy process, and markets often pay close attention when senior officials converge on similar language. By October 1, Reuters reported that the probability of an October hike had already fallen to about 25% from around 70%, even before the weak payroll report pushed it lower. The sequence shows how monetary policy expectations are formed in real time: investors combine incoming economic numbers with policymakers’ interpretation of those numbers. In this case, the message from both was the same—another increase may still come, but October no longer looks like a deadline.
Inflation Is Still Too High for a Victory Lap
The reason a December hike remains very much alive is that U.S. inflation is still running above the Fed’s goal. The Bureau of Economic Analysis reported that the personal consumption expenditures price index rose 3.4% from a year earlier in August, while the core measure excluding food and energy increased 3.0%. The Fed’s September projections put 2026 PCE inflation at 3.7% and core inflation at 3.4% on a fourth-quarter basis, both well above the central bank’s 2% objective. Softer job growth buys policymakers time, but it does not erase the inflation problem that prompted September’s rate increase.
That is why the collapse in October odds is not the same thing as the end of the tightening cycle. Reuters reported on October 5 that markets still assigned roughly an 84% chance to a December increase. The Fed therefore faces a sequencing problem: pause now, gather more evidence, and retain the option to tighten later if inflation remains stubborn. For consumers and businesses, that means relief from an immediate October hike does not necessarily translate into meaningfully cheaper credit. Short-term rates can stay restrictive even during a pause, and long-term borrowing costs can remain high if investors continue to demand compensation for inflation, government borrowing or other risks.
The Bank of Canada Is Facing a Different Kind of Squeeze
Canada’s rate story is moving in the same direction, but from a different starting point. The Bank of Canada has kept its overnight rate at 2.25% since October 2025 and held it there again on September 2. At that meeting, the Bank said higher energy prices and new U.S. tariffs had increased upside risks to inflation even as trade uncertainty clouded growth. Those competing pressures made a future hike look plausible. By October 5, however, Reuters reported that odds of an October increase had receded, although LSEG-compiled pricing still implied at least one Bank of Canada hike before the end of 2026.
The retreat in October pricing reflects a central bank with less room for a simple answer. Canada does not have the same labour-market picture as the United States, and domestic growth has been uneven. At the same time, inflation has been pushed higher by energy costs, creating the uncomfortable possibility that tighter policy could restrain an already softer economy while doing little to solve externally driven price shocks. The Bank’s next decision is therefore less about choosing between “hawkish” and “dovish” labels than deciding whether inflation risks are persistent enough to justify another increase now, or whether waiting would better protect the recovery without sacrificing price stability.
Canadian Data Are Sending Conflicting Signals
The latest Canadian numbers explain why traders have become less confident about an October hike. Statistics Canada reported that headline CPI inflation was 3.0% in August, unchanged from July, but much of the pressure came from gasoline, which was 22.8% more expensive than a year earlier. Excluding gasoline, inflation was 2.4%. Meanwhile, employment fell by 42,000 in August, the unemployment rate held at 6.4%, and year-over-year average hourly wage growth slowed to 2.0%. Those labour figures point to considerably less demand pressure than a headline inflation rate of 3% might suggest.
Growth data are similarly mixed. Real GDP was unchanged in July after several months of expansion, while Statistics Canada’s advance estimate suggested a 0.2% rebound in August. More recently, S&P Global’s Canada services PMI remained below the 50 threshold in September, signalling contraction for a fourth consecutive month even as the index improved to 48.3. The result is a policy puzzle: energy and tariff risks could keep inflation elevated, but employment and parts of the service economy are showing restraint. That combination makes waiting for fresh data a defensible option—and helps explain why the market has pulled back from earlier confidence in an October move.
Markets Are Reacting Before Central Banks Do
Central banks have not changed rates since these latest data arrived, but financial markets already have. The S&P/TSX Composite gained nearly 1% on the Friday of the U.S. jobs report as investors reduced the chance of an immediate Fed hike. By Monday morning, however, the Canadian index was down about 0.2% in early trading as weaker oil prices weighed on energy shares. The contrast is a useful reminder that rate expectations are powerful, but they are only one force moving markets. Oil, global bond yields, geopolitical risk and corporate news can easily reinforce or offset the effect of a more patient central-bank outlook.
Borrowing costs can also move before an official rate decision. The Bank of Canada notes that changes in its policy rate usually influence short-term rates and prime rates, which are important for variable-rate borrowing. Canadian fixed mortgage rates are generally benchmarked against Government of Canada bond yields, especially around the five-year maturity, so changes in bond-market expectations can filter through even when the overnight rate is unchanged. That is why a collapse in October hike odds can matter immediately to financing conditions without guaranteeing lower mortgage rates. If longer-term bond yields stay high because of inflation or term-premium pressures, fixed borrowing costs may remain stubborn even as near-term central-bank expectations soften.
October 28 Has Become a Two-Central-Bank Showdown
The next few weeks contain several opportunities for the market to change its mind again. Canada releases its September Labour Force Survey on October 9 and September CPI on October 19. In the United States, September CPI is due October 14, while the minutes from the Fed’s September meeting arrive October 7. Each release can alter the balance between inflation risk and growth risk. A hotter inflation print or renewed strength in hiring could revive hike expectations; another round of weak labour or activity data could strengthen the case for patience.
The calendar then converges on October 28, when both the Bank of Canada and the Federal Reserve are scheduled to announce policy decisions. That unusual same-day setup will put North American interest-rate divergence under a microscope. The current market message is clear but provisional: an October Fed hike has gone from the base case to a long shot, while the Bank of Canada’s October hike case has also weakened. Yet neither central bank is signalling that the job is finished. The more durable question is whether inflation remains persistent enough to force another increase before year-end—or whether weakening demand gives policymakers a reason to stop where they are.
