According to Woofun AI, Federal Reserve officials have recently signaled a preference to hold off on raising rates at their October 27-28 meeting and delay the next policy move until December.

However, this dovish expectation is now facing a severe test, with the September Consumer Price Index (CPI) data due on Wednesday set to become the key variable determining the direction of monetary policy. If inflationary pressure continues to intensify, the Fed may be forced to restart rate hikes at the end of October; conversely, if the data proves mild, officials will have more reason to keep rates unchanged. It is worth noting that the political backdrop of the approaching midterm elections is also seen as one of the important factors behind the Fed's desire to pause this month.

The month-on-month change in core CPI is the focus of market attention, because the gauge excluding food and energy prices better reflects underlying inflation trends. Economists generally expect September core CPI to rise 0.2% month-on-month, down from 0.3% in August, while the year-on-year gain may climb from 2.4% to 2.5%. If the data match the 0.2% forecast, bets on an October rate hike will not increase significantly, and the focus will shift to the December meeting. As of now, Wall Street traders see only a 17% probability of a Fed rate hike in October.

Stephen Juneau, U.S. economist at Bank of America Securities (BAC.US), pointed out that a 0.2% month-on-month rise in core CPI would not push up rate hike expectations. However, Avery Shenfeld, chief economist for capital markets at Canadian Imperial Bank of Commerce (CM.US), holds the opposite view, expecting core CPI to rise 0.3% month-on-month and arguing that the Fed will raise rates this month. Shenfeld stressed that too many items are still growing at a pace exceeding 3%, which constitutes an upside risk. Data compiled by Woofun AI shows that this divergence in expectations directly reflects differing judgments about inflation stickiness, and that the tiny difference between 0.2% and 0.3% is enough to change the policy path.

Headline inflation faces greater upward pressure. A Wall Street Journal survey of economists shows that, affected by rising energy prices, September headline CPI may rise 0.6% month-on-month, the fastest pace in five months, while the year-on-year gain is expected to climb from 3.4% in August to 3.7%. Fed officials will also watch the Producer Price Index (PPI) on Thursday, as both CPI and PPI data feed into the Fed's preferred inflation gauge, the Personal Consumption Expenditures (PCE) price index.

Inflation data not only bear on whether rates rise in October, but also shape market judgments about the magnitude of subsequent tightening. The vast majority of Fed officials expect one more rate hike this year, and a considerable number believe another increase is possible in 2027. Markets have already priced in three cumulative hikes, which would reverse the three rate cuts the Fed implemented at the end of 2025.

Kurt Lewis, head of central bank policy at Piper Sandler (PIPR.US), expects the Fed to raise rates three times in total before reassessing the inflation outlook. He believes this tightening path will not harm the U.S. labor market. Lewis noted that Fed officials expect core PCE inflation to fall to 2.5% by 2027. If future data do not show such improvement, the Fed may keep raising rates. Lindsey Piegza, chief economist at Stifel Financial (SF.US), believes at least three to four more rate hikes are needed to bring inflation under control.

Opinions within the Fed remain divided on the inflation outlook, with some officials worried about further increases in price pressure, while others believe inflation will gradually cool as tariff effects fade and energy prices stabilize. Wednesday's core CPI reading has therefore become an important watershed for the near-term monetary policy path. If the data are mild, the Fed may be able to delay a hike until December, giving the economy room to breathe; if price pressure exceeds expectations, the likelihood of tightening again this month will rise, possibly triggering expectations of a late-October hike and multiple subsequent tightenings. This decision will not only affect short-term market sentiment, but also reshape investors' judgments about the long-term interest rate path. Against the backdrop of intertwined tariff effects and energy price swings, any deviation in inflation data may be amplified by the market. The Fed needs to find a delicate balance between controlling inflation and supporting economic growth, and Wednesday's data will provide key clues. For market participants, closely watching the divergence between core CPI and headline CPI, as well as subsequent confirmation from PPI data, will be a key strategy for coping with policy uncertainty.