The Federal Reserve will announce its interest-rate decision at its September 15-16 meeting, with market expectations for a potential rate hike rising significantly. Following Fed Chair Kevin Warsh's speech at Jackson Hole, the probability of a September rate increase climbed from approximately 33% to 66% according to market pricing, with some estimates reaching as high as 80%.
Kalshi traders currently assess a 55% chance of a 25-basis-point rate hike, while 46% of traders expect rates to remain unchanged. Only 2% anticipate a hike exceeding 25 basis points.
Labor Data Set to Influence Decision
Warsh's case for maintaining or raising rates depends partly on labor market strength. He cited 4.1% unemployment and near-record-low jobless claims as indicators that the Fed has room to raise rates without harming workers.
Key labor reports this week will test this assessment. The JOLTS report will reveal hiring trends, while the ADP report provides early private payroll readings. The nonfarm payrolls and unemployment figures due Friday represent the most critical data point, with strong numbers potentially supporting a September hike and weak figures complicating the case for an increase.
The Fed will also receive PPI and CPI data the following week, shortly before its meeting.
Competing Views on Rate Hike Probability
Economist Steve Hanke estimates an approximately 80% chance of a September rate increase, higher than broader market expectations. Three Federal Open Market Committee members had already voted for a rate increase at the previous meeting. Hanke expects Warsh could join them and potentially influence other members, though he noted his view could change if economic data became very weak.
A market analysis from Wellington-Altus presents the case against a September hike, suggesting that renewed price pressure may stem from supply shocks rather than strong demand. The analysis points to softer employment conditions and pressure in interest-rate-sensitive sectors including housing, construction, and consumer durables. It notes that two-year inflation breakevens remain well anchored.
Market Sentiment and Broader Context
Geopolitical tensions and oil prices continue to keep risk appetite fragile as markets await the Fed's decision. Some market observers see the September 15-16 meeting as a potential turning point for broader market sentiment.
