Expectations that the Federal Reserve will raise interest rates in September have surged after Chair Kevin Warsh delivered a firmly hawkish message, despite the central bank voting to leave borrowing costs unchanged.
The Federal Open Market Committee (FOMC) opted by a margin of 9-3 to hold its target range steady, but Warsh used his post-meeting press conference to underline that the Fed remains focused on fighting inflation rather than edging towards easier policy.
“There is no soft inflation target, there is no soft implicit target, not on this Committee’s watch,” Warsh said, stressing that policymakers are not prepared to relax their stance on price stability.
His comments triggered an immediate repricing across futures and prediction markets, with traders shifting their attention from the latest decision to the prospect of a move at the next meeting on 16 September.
Markets move to price in a September increase
Interest rate futures tracked by the CME FedWatch Tool now imply a 61.4% chance of a 25-basis-point rise in September, which would take the target range to 3.75%–4.00%. A month earlier, markets had seen the probability at 50.6%.
The likelihood of a larger 50-basis-point hike has evaporated, dropping from 25% just a week ago to zero, while traders are assigning no chance to a rate cut.
Prediction platforms are telling a similar story. On Kalshi, participants are assigning a 53% probability to a 25-basis-point increase, compared with 44% for no change, with more than $1.36m in volume recorded.
Polymarket, where over $8m has changed hands, shows a 52% implied chance of a hike against 46% for another hold. While each venue uses a different methodology, all are reacting to the same themes: stubborn inflation, and a Fed leadership that appears more concerned with shoring up its inflation-fighting credibility than preparing investors for looser policy.
Warsh’s tone was interpreted by traders as a classic “hawkish hold” – a decision to stand pat on rates paired with language that keeps the door wide open to tightening at the next opportunity.
Warsh flags bond yields and AI investment as key shifts
Warsh began his remarks by highlighting two developments in the 42 days since the FOMC last convened: a sharp rise in Treasury yields and a surge in investment linked to artificial intelligence.
He described the recent upward move in both nominal and inflation-adjusted Treasury yields as “among the most significant in the last two decades”. Such moves tend to tighten financial conditions even before the Fed changes its policy rate, making them a crucial indicator for officials.
Warsh attributed part of the bond market adjustment to the Fed pulling back from detailed forward guidance, saying markets are now “learning to play the ball, not the referee” – an indication that investors are being forced to respond more to economic data than to explicit signals from policymakers.
The second major shift he identified was in business spending. Warsh noted that artificial intelligence (AI)-related investment has become deeply intertwined with broader capital expenditure, as large AI infrastructure projects impact manufacturing, semiconductors, energy demand and construction simultaneously.
According to Warsh, investment in AI equipment and software has climbed nearly 20% over the past four quarters. That has supported factory output but also complicated the inflation picture, since the same spending wave increases demand for high-value hardware and infrastructure, adding to price pressures.
Four questions dominating the Fed’s internal debate
Warsh said much of the latest meeting was spent wrestling with four practical questions shaping the Fed’s next steps.
The Committee discussed how five consecutive years of above-target inflation should shape current policy choices, and how various economic shocks are feeding through to employment and growth.
They also examined whether the AI-driven boom in capital spending is likely to be a short-lived source of higher prices or a more durable inflation threat, and debated the extent to which the Fed’s balance sheet is still providing monetary support on top of the level of interest rates.
Wall Street reels then recovers after Fed shock
US equity markets initially reacted negatively to the Fed’s message on Wednesday before staging a partial rebound the following day, a pattern often seen after major policy announcements as investors digest both the decision and the press conference.
Wednesday’s trading produced the Dow Jones Industrial Average’s heaviest one-day fall in around 15 months, with the index dropping about 2.2%. The S&P 500 lost roughly 1.5%, while the Nasdaq Composite fell around 1.7%. In total, US stocks shed about $1.2tn in market value during the session.
By midday on Thursday, buyers had returned. The Dow recovered about 0.6% to trade close to 51,900. The S&P 500 was up between 1% and 1.2%, and the Nasdaq gained roughly 1.5% to 2.4%, helped by stronger-than-expected Azure cloud results from Microsoft.
Meta shares underperformed after the company issued weaker guidance, while persistent strength in long-term Treasury yields – with the 30-year yield hovering near multi-year highs – continued to curb broader risk appetite.
Bitcoin steady as traders wait for more data
In contrast to the swings in equities, bitcoin traded in a relatively tight range, holding above $64,000 with a slight upward bias. More than $20bn changed hands over 24 hours, yet price action remained orderly.
The restrained trading suggested that crypto market participants were reluctant to take aggressive positions solely on the back of the Fed meeting, preferring to wait for further macroeconomic data. The consolidation comes after bitcoin retreated from highs near $66,000 earlier in July.
Away from public markets, Hyperscale Data, Inc. was active in crypto financing. The company sold around 100 BTC and opened a bitcoin-backed credit facility on 30 July 2026, in a move aimed at accelerating its operations. The firm repeated this disclosure, underscoring the importance of the transaction to its funding strategy.
Focus turns to data ahead of September decision
The Fed’s next policy decision is scheduled for 16 September, giving officials about seven weeks to assess fresh figures on inflation, employment and consumer spending.
With the Committee divided at the latest meeting, incoming data could carry added weight, as shifts in the economic outlook may quickly alter the internal balance of opinion.
Warsh ended the press conference by underlining that the Fed is moving away from highly predictable signalling and towards decisions that hinge more directly on evidence and internal debate over inflation dynamics, supply-side constraints and AI-led investment.
For investors, the crucial question heading into September will be whether the Fed’s eventual move matches the path markets are now pricing. If inflation proves persistent and long-term yields remain elevated, a quarter-point increase in September would be seen less as a shock and more as confirmation of a tightening trajectory that traders have already begun to anticipate.
