Less than three weeks before the Federal Reserve meets in September, traders cannot decide whether it will raise rates. CNBC reported on August 28 that the question had become close to a coin flip, and that one speech was the reason.
Kevin Warsh, the Fed chairman, gave the keynote at the central bank’s annual symposium in Jackson Hole, Wyoming, on a Friday. He said he was committed to fighting inflation. Before he spoke, the odds that the Fed would leave rates alone at its September meeting were nearly 70%. Afterward they dropped.
What the markets priced in
The numbers CNBC cited differ by platform. On Kalshi, a prediction market, traders put the chance of a 25 basis point hike at 48%. Fed funds futures traders saw a nearly 56% chance of a quarter-point increase, according to the CME’s FedWatch tool. Polymarket speculators were at 49%.
It has been a swing back and forth. After the Fed’s July meeting, investors were fairly sure a September hike was coming. Three members of the Federal Open Market Committee had disagreed with the majority’s decision to hold rates steady and argued that rates needed to go higher because inflation remained elevated. Then odds of a hike fell over the following month. A weaker-than-expected employment report showed the US lost jobs in July, and inflation, still above the Fed’s 2% target, cooled.
Warsh on the data
Warsh took on those reports directly, and did not treat them as a green light. “While this summer’s [inflation] readings were better than expected,” he said, “they do not tell me that underlying trends have meaningfully improved.”
He went on: “We must be confident that underlying inflation is moving to our objective, clearly and at sufficient speed. Otherwise, we have work to do. That’s our job, our mandate and our charge to keep.”
Bond traders reacted quickly. Short-term yields rose, and the 2-year Treasury yield, which tracks expectations for the Fed’s short-term rate, reached its highest level since late July.
The Fed announces its decision on September 16.
