Federal Reserve
Traders were pricing in about a 73% probability that the Fed would raise rates at its Oct. 27-28 meeting, up from roughly 53% earlier. Getty Images

Markets sharply increased their bets on an October Federal Reserve rate hike Wednesday after fresh data showed U.S. business activity accelerating while companies faced their strongest increase in input costs in nearly four years.

Traders were pricing in about a two-thirds probability that the Fed will raise rates at its Oct. 27-28 meeting, up from roughly 53% earlier, according to the CME Group's FedWatch tool. The shift followed stronger readings from the manufacturing and services sectors as well as comments from Federal Reserve Governor Michael Barr, who said further policy adjustments were likely to be needed.

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Wednesday's economic data gave traders fresh reason to reassess the timing of the Fed's next move. S&P Global's flash U.S. Composite PMI Output Index, which tracks activity across manufacturing and services, rose to 58.4 in September from 56.0 in August, its highest level since July 2021.

Growth strengthened across both parts of the private sector, with the services index reaching 58.7, its highest level in 59 months, while the manufacturing index climbed to 56.7, a 53-month high. New orders also increased sharply, while companies added workers as backlogs grew.

Businesses were dealing with higher costs at the same time, with S&P Global's measure of input prices reaching its highest level since October 2022. Companies reported increases in wages, fuel and transportation expenses, while supplier delivery times lengthened as demand put additional pressure on capacity.

Higher oil prices have added to those pressures as the war involving the U.S. and Iran continues to affect energy markets. Crude has traded above $100 a barrel during the conflict, increasing fuel and transportation expenses that feed into costs for businesses and consumers.

Inflation pressures have also spread beyond energy. St. Louis Fed President Alberto Musalem said earlier this week that strong demand and supply pressures were keeping inflation elevated, with businesses reporting higher costs for fuel, raw materials, transportation, insurance and skilled labor.

The Fed raised its benchmark rate by 25 basis points last week to a target range of 3.75% to 4%, its first increase in more than three years. Policymakers' projections released with the decision showed that 16 of 18 officials expected at least one additional quarter-point increase before the end of 2026.