The Federal Reserve's Latest October Inflation Forecast Has Arrived, and It's Terrible News for Wall Street
Year four of Wall Street’s bull market didn’t disappoint. The artificial intelligence (AI) infrastructure build-out lifted the Dow Jones Industrial Average (^DJI -0.98%), S&P 500 (^GSPC -0.50%), and Nasdaq Composite (^IXIC -0.40%) to several record highs throughout 2026.
But expecting the Dow, S&P 500, and Nasdaq Composite to head higher amid persistently elevated inflation is a tall task. Fed Chair Kevin Warsh and the Federal Open Market Committee (FOMC) have quite the challenge on their hands in delivering price stability. Unfortunately, the latest inflation update for October hasn’t done policymakers or Wall Street any favors.
Fed Chair Kevin Warsh and the FOMC may raise rates multiple times in 2027. Image source: Official Federal Reserve Photo.
The Fed’s October inflation update is a double whammy for stocks
Though there’s no perfect inflation prediction tool, the Federal Reserve Bank of Cleveland’s Inflation Nowcasting tool comes pretty close. The Cleveland Fed’s tool provides daily forecasts for current- and forward-month inflation that are updated after the release of relevant economic data.
As of Oct. 20, forecasts for two key inflation measures were headed in the wrong direction.
For starters, we know the Consumer Price Index (CPI) reaccelerated to an annualized 3.7% in September. The Cleveland Fed’s inflation tool predicts further acceleration to 3.77% in October. Rapidly rising fuel costs, caused by the ongoing closure of the Strait of Hormuz, likely explain why headline inflation is heading higher.
Price changes over last year (September CPI report)
Fuel Oil: +74.0%
Gasoline: +34.2%
Gas Utilities: +5.0%
Electricity: +4.4%
Overall CPI: +3.7%
Food away from home: +3.5%
Apparel: +3.4%
Shelter: +3.2%
Transportation: +2.7%
Medical Care: +2.5%
Food at home: +1.8%
New Cars: +0.6%
Used Cars: -1.5%— Charlie Bilello (@charliebilello) October 14, 2026
What’s arguably even more worrisome is the projection for Core Personal Consumption Expenditures (PCE). Core PCE excludes volatile food and energy costs, providing a comprehensive look at long-term price trends.
After three consecutive months of Core PCE standing pat at 3%, the Inflation Nowcasting tool predicts a steady reacceleration to 3.05% in September (Core PCE for September will be released on the 30th) and 3.13% in October.
The projected uptick in Core PCE suggests that the U.S. economy is dealing with more than just an energy supply shock. Businesses altering their shipping routes and shifting suppliers due to the Iran war are just some of the added costs now affecting the broader economy.
Image source: Getty Images.
The odds of multiple FOMC rate hikes are climbing, and that’s terrible news for stocks
With headline inflation topping the Fed’s long-term 2% target for 67 months (and counting), Fed Chair Warsh hasn’t minced his words about delivering price stability. On Sept. 16, Warsh and 11 other FOMC members voted unanimously to raise interest rates by a quarter point to 3.75%-4.00%.
With both headline inflation and Core PCE, the latter of which is one of the Fed’s preferred price gauges, continuing to move in the wrong direction, the odds are increasing that policymakers will undertake several rate hikes over the next year.
Two years ago, when the Fed started lowering rates, 10 policymakers thought rates would eventually settle out below 3%, compared to 7 who thought rates would settle out above 3%. Two were right at 3%.
Today, just one policymaker wrote down a “long-run” rate projection below 3%, while 11 think it is higher than 3%. Six think it is 3%.
While it is usually hard to get worked up about the very-far-out years in the SEP (because it is mostly illustrative, ie., they simply show inflation coming down to 2% and rates converging at the long-run neutral estimate), the projections for 2029, included in today’s table, are notable because they show more than half of the 17 people who submitted a projection think rates will stay at or above 3.6% (the level they’ve been at all year, before this week’s increase) to get inflation down to 2%. It underscores how risks to the long-run rate estimate are to the upside.
— Nick Timiraos (@NickTimiraos) September 17, 2026
According to the CME Group‘s (CME -0.11%) proprietary FedWatch Tool, which uses 30-day Fed Funds futures to track the probability of changes to the federal funds target rate, there’s a 72% probability that interest rates will rise by at least 75 basis points to 4.50%-4.75% by Sept. 15, 2027.
An aggressive Fed rate-hiking cycle would be awful news for a historically expensive, AI-driven bull market. If borrowing becomes costlier and the AI infrastructure build-out slows, even slightly, this could be enough of a catalyst to send a pricey stock market lower rather quickly.