Fed rate hike odds drop to 45% as data splits FOMC

Traders cut September rate-hike odds to 45 percent from 67 percent, yet Cleveland Fed projections show core inflation reaccelerating — a divided FOMC showdown looms.

Traders now price a 45 percent probability that the Federal Reserve raises rates at its September 15-16 meeting, down from 67 percent a week earlier, as softer jobs data collides with sticky core inflation.

"Our forecast for core CPI of 0.22 percent is probably not quite firm enough to prompt a hike from the Fed at the September meeting, though repeated prints closer to 0.3 percent could do it," said Michael Feroli, chief U.S. economist at JPMorgan.

The Cleveland Fed's Inflation Nowcasting tool projects July core CPI rising 0.21 percent month-over-month, up from June's flat reading, with the annual rate at 2.52 percent. Core PCE, the Fed's preferred gauge, is projected to rise 0.27 percent in July, holding at 3.31 percent annually, and climb to 3.36 percent by August. The 10-year Treasury yield traded at 4.662 percent, while gold held near $4,333 an ounce after gaining more than 7 percent last week.

The September 15-16 FOMC meeting will follow the July CPI release on August 12 and the August CPI report expected September 11. If actual data comes in above projections, the three dissenting hawks from July could gain allies; if it undershoots, doves can justify another hold. Either way, the committee faces its most consequential policy decision since the Fed began cutting rates last year.

Three Dissents Mark Deepest Split Since 2016

At the July FOMC meeting, three of 12 voting members favored an immediate rate hike — the first time since 2016 that three voters shared the same dissenting stance. Fed Chair Kevin Warsh, sworn in May 22 as the 17th chairman, reiterated the 2 percent inflation target during his post-meeting press conference but remained vague on the specific policy path, adding to market uncertainty.

The fed funds rate currently sits at 3.75-4.0 percent, unchanged since the Fed paused its easing cycle. At the mid-June meeting, nine of 12 members favored at least a quarter-point hike at some point in 2026, according to the FOMC statement. The May core PCE reading of 3.4 percent annually was the highest in three years, though the Cleveland Fed's projections suggest some moderation by July.

JPMorgan's wealth management strategists have adjusted their baseline forecast to incorporate a 25-basis-point hike in September, citing slower-than-expected supply chain recovery through the Strait of Hormuz, combined with market skepticism over the Fed's inflation-fighting credibility following the July meeting. In contrast, Wells Fargo Chief Economist Tom Porcelli maintains the Fed will remain on hold throughout 2026.

Cross-Asset Transmission

The shifting rate expectations have rippled across markets. U.S. Treasury bonds rallied Friday after the weaker-than-expected jobs report, pushing Wall Street's major indexes to record highs. Asian markets followed, with Japan's Nikkei rising 2 percent and South Korea's benchmark gaining 0.8 percent. The euro held near a seven-week high at $1.1553, while the dollar gained 0.3 percent against the yen to 158.35.

Gold's 7 percent weekly gain reflects both lower bond yields and safe-haven demand from Gulf tensions. Brent crude rose 0.6 percent to $84.04 a barrel as uncertainty over reopening the Strait of Hormuz kept energy supply risks elevated.

The market is balancing two competing forces: weaker U.S. employment data has reduced rate-hike expectations and encouraged equity buying, while unresolved Gulf supply disruptions threaten to push oil prices higher and create renewed inflationary pressure. Wednesday's U.S. inflation report could determine whether that optimism holds — and whether the FOMC's September meeting becomes a genuine policy showdown.

This article is for informational purposes only and does not constitute investment advice.