Investors are slashing down the odds of a 75-basis-point rate hike in December and beyond as the Fed hints at smaller increases

• Investors on Friday pulled down expectations the Federal Reserve will issue another rate hike of 75 basis points in December and beyond.
• The probability of another jumbo-sized rate hike at the end of the year fell to 45% from 75% on Thursday.

Investors on Friday pulled down expectations the Federal Reserve will issue another rate hike of 75 basis points in December as they embraced signs that policymakers may temper jumbo-sized increases during their inflation fight.

The CME FedWatch tool still shows expectations for a 75-basis-point increase next month are locked in. But the probability for an increase of that size in December fell to 45.4% on Friday from 75.4% a day ago. The probability of a rate increase of 50 basis points in December, meanwhile, rose to 51.8% from 24.2% on Thursday.

Looking ahead into the first meeting of 2023, the odds of a rate hike of 75 basis points fell to 13.7% from 38.2% a day earlier. Stocks soared on Friday, with the S&P 500 rising by more than 2%.

Pricing in the fed funds futures market shifted Friday after a report from The Wall Street Journal and, separately, comments made by San Francisco Federal Reserve President Mary Daly.

According to the Wall Street Journal, Fed officials led by Chair Jerome Powell are headed toward raising the fed funds rate by another 75 basis points in November, then likely debate whether and how to signal plans to approve a smaller rate increase in December.

Some officials have started signaling their preference to slow down the pace of increases and stop raising rates early next year to monitor the effects of this year's policy moves, the report said.

Indeed, Daly did as much on Friday. Overtightening interest rates can put the economy "into an unforced downturn," she said during a fireside chat held by the University of California, Berkeley's Fisher Center for Real Estate & Urban Economics' Policy Advisory Board.

"We might find ourselves, and the markets have certainly priced this in, with another 75-basis-point increase," Daly said, according to Reuters. "But I would really recommend people don't take that away and think, 'well it's 75 forever,'" she said while speaking in Monterey, California.

She reiterated her view that interest rates will need to rise above 4.5% to tamp down on inflation. Headline inflation was running above 8% in September.

The Fed has raised rates five times so far this year, including three consecutive increases of three-quarters of a percentage point, to send the fed funds rate to a range of 3% to 3.25% from 0%.