The number that matters most this morning is not the one that will make the biggest headline. Forecasters expect headline CPI to rise 0.6% in September, which would be the strongest monthly gain since April. That surge is almost entirely a gasoline story. The national average for a gallon of regular gasoline ran a little above $4.30 in September, up from roughly the high-$3.80s in August. Readers will see the 3.6% to 3.7% annual rate and conclude inflation is reaccelerating. They will be looking at the wrong line.
The Cleveland Fed’s nowcast has headline inflation at about 3.6% year over year for September while core inflation is near 2.4%. Energy is pushing the headline up; everything else is behaving. Core inflation, which excludes volatile food and energy prices, is expected to rise 0.2% from August, leaving the year-over-year core rate around the mid-2% range. If that 0.2% core holds, it supports the case that the Fed is dealing with a commodity shock more than a broad-based wage and services spiral. That is a very different situation than the headline suggests, and the bond market knows it.
What the Yield Curve Is Already Saying
Ahead of the report, the 10-year Treasury yield was down about 2 basis points to 5.195% and the 2-year was also down about 2 basis points to 4.772%. Those moves were already in motion before the 8:30 a.m. ET release, partly a residue of Tuesday afternoon. Treasury yields edged lower after Williams’ remarks, with two-year yields erasing an earlier increase. The dollar moved in the same direction, with the dollar index lower around the low-102 area after his comments.
The response was rational. New York Fed President John Williams told Bloomberg News that he still sees one more rate hike as appropriate this year, but at the moment does not believe it will be necessary for the central bank to increase rates again in 2027. Yields fell because the statement effectively caps the tightening cycle at one further move. The dollar fell for the same reason.
Where Williams and the Market Disagree
Here is where it gets complicated. Futures pricing still implies traders largely expect at least one rate increase in 2027, and Bloomberg reported that pricing implies roughly 90% odds the fed funds rate ends 2027 at least half a percentage point above today’s level. Williams sits on the opposite side of that bet. In the same Bloomberg interview, he said there are still signs inflation will slow materially and move closer to the Fed’s 2% target next year as the effects of tariffs and the energy shock fade.
His reasoning leans on the core. He has argued that disinflationary forces are at work and has emphasized that there are no clear signs the labor market is adding new inflation pressure. But not every Fed official reads the situation the same way. The article’s specific account of Richmond Fed President Tom Barkin speaking at Howard University on Tuesday could not be verified, so it has been removed here. Today Barkin is on the calendar again, and the Fed’s Beige Book is scheduled for 2:00 p.m. ET.
October 28: Already Largely Decided
Federal Reserve interest-rate futures continue to imply a roughly one-in-five chance of a rate increase at the October 27-28 meeting, with widely followed rate-monitor tools putting the odds near 20% for a quarter-point increase against about 80% for a hold in the current 3.75%-4.00% range. Traders remain more confident that any additional hike comes later in the year than that it comes in October. The article’s claim about a survey of 14 major brokerages, including a count of how many expected an October hold and which single bank expected a hike, could not be verified and has been removed.
A hot core reading, 0.3% or above, could reopen that one-in-five probability and push it meaningfully higher before the opening bell. A soft core at or below 0.2% locks October in as a hold and shifts the real debate entirely to December. The specific Deutsche Bank quotation in the original draft could not be verified, so it has been removed, but the timing point stands: this CPI lands two weeks before the October FOMC decision, and the next PCE inflation report is not due until after that meeting.
The Question That Survives the Number
Whatever today’s CPI shows, the larger disagreement does not resolve until well into next year. Williams is betting that energy prices are transient and that core’s deceleration is real. In the Fed’s September Summary of Economic Projections, eight of the 18 participants who submitted year-end 2027 rate dots placed their 2027 projection above the level implied by just one additional hike this year, signaling they see further tightening beyond that baseline.
If today’s core comes in at 0.2% or below, Williams looks correct and December becomes the last hike in the cycle. If it prints at 0.3% or above, the camp warning about persistence gains ground and the market’s implied 2027 tightening starts to look less like overcorrection and more like foresight. The bond market is already leaning one way. The data gets a vote at 8:30.
