Traders pared back their expectations for the Federal Reserve to raise interest rates in October after the central bank’s preferred measure of inflation accelerated by less than expected. Interest-rate swaps show traders Wednesday pricing in about a 36% chance that officials boost rates when they meet in about a month, compared to roughly coin-toss odds seen prior to the data. Treasuries rose, led by short-term notes that are most sensitive to the Fed’s policy path.

The moves pushed down two-year yields by almost five basis points to 4.83%, the lowest in just over a week. "This helped markets breathe sigh of relief given the focus on inflation," said Gennadiy Goldberg, head of US interest-rates strategy at TD Securities. "But markets remain hesitant to rally too much given the uncertainty about methodology changes." The Fed’s preferred measure of inflation, the personal consumption expenditures price index, increased 0.3% from a month earlier. Excluding food and energy, the PCE price index rose 0.2%, lower than the median forecast of 0.3% by economists surveyed by Bloomberg. The release included some methodological changes in the way inflation is calculated.

Expectations for an October rate increase had been slipping since Tuesday, when New York Fed’s John Williams said "one further upward adjustment" to the central bank’s target range for a US overnight lending rate "may be appropriate late this year" to contain inflation. Fed officials lifted their benchmark rate for the first time since 2023 earlier this month.