The focus has shifted to the Federal Reserve’s September 16 federal funds rate decision. CME’s FedWatch Tool, which converts federal funds futures trading into implied policy probabilities, currently gives a 57% chance of a 25-basis-point rate hike that would lift the target range to 3.75%-4%. The probability of holding rates at the current 3.5%-3.75% range stands at 43%. With uncertainty elevated, forecasts for the next Federal Open Market Committee decision remain highly divided.
September Fed Rate Hike Bets Rise Sharply
The shift is even more striking compared with trader expectations just one week earlier. CME data showed that the probability of a rate hike was only 39.9% on Aug. 21. By Aug. 28, following the Jackson Hole speech, that figure had climbed to 57%, while bets on a September rate cut had almost disappeared.
Prediction markets have not fully embraced the hawkish outlook. As of this weekend, Polymarket traders assigned a 52% probability to the Fed holding rates and 48% to a 25-basis-point hike. More than $66.6 million has changed hands on the wager, while the once-common rate-cut position now carries odds of just 1%.
Traders on the prediction marketplace Kalshi are seeing similarly close odds. Its September Fed market, with more than $23.8 million in volume, puts the probability of no change at 52%, compared with 48% for a quarter-point hike.
Another Kalshi betting contract gives the Fed a 67% chance of raising the federal funds rate at some point before 2027.
Warsh Highlights Persistent Inflation Risks
The market probabilities shifted significantly after Warsh’s keynote at the Jackson Hole Economic Policy Symposium. He avoided promising a September rate hike but repeatedly emphasized persistent inflation and the Federal Reserve’s responsibility to restore price stability.
“There should be no misunderstanding: The Fed’s price-stability objective of 2 percent, as measured by the personal consumption expenditures (PCE) price index, is a firm, fixed target,” Warsh stressed.
He also made clear that short-term interest rates remain the Fed’s primary tool for achieving that objective.
The inflation figures Warsh cited help explain why traders interpreted his remarks as hawkish. The Fed’s preferred 12-month PCE inflation measure is running at 3.7%, while the six-month reading is higher at 4.1%. Neither figure is close to the central bank’s fixed 2% target, although some Fed critics believe that level will never be reached again.
Warsh also described an economy that gives policymakers little reason to fear the effects of higher interest rates. Business investment is rising rapidly, particularly in the artificial intelligence (AI) sector. S&P 500 profits have increased more than 20% over the past year, while real consumer spending has grown more than 2% over four quarters. Unemployment remains at 4.1%.
Markets Face a Close September Fed Decision
That combination of persistent inflation and solid economic growth creates a difficult environment for federal funds rate doves. Higher rates can cool demand and inflation, while continued growth and employment give policymakers more room to tighten monetary policy without immediately damaging the labor market.
Warsh still declined to commit to a rate hike, saying:
“I stand here today committed to a discipline, not to a decision.”
The message was deliberate: Markets can speculate about September, but the Federal Reserve does not intend to provide traders with an answer weeks before the meeting. For investors, the decision has become a genuine coin toss, with substantial money positioned on both outcomes. CME futures currently favor a hike, while Polymarket and Kalshi narrowly lean toward a rate hold.
Inflation and labor-market reports will now carry even greater weight, and either could shift the balance before Fed officials meet in mid-September.
Source: cryptonews.net
