September’s Federal Reserve meeting has become a much closer call for investors, with the CME FedWatch tool now assigning a 57% probability to a quarter-point interest-rate increase after Chairman Kevin Warsh delivered a speech at Jackson Hole that markets interpreted as hawkish.
The focus is now firmly on the Federal Open Market Committee’s federal funds rate decision on 16 September. CME FedWatch converts trading in federal funds futures into implied expectations for monetary policy. Its latest figures give a 25-basis-point increase a 57% chance, which would lift the target range from 3.5%-3.75% to 3.75%-4%.
The probability of the Federal Reserve leaving rates unchanged at 3.5%-3.75% stands at 43%. The figures highlight the uncertainty surrounding the meeting, with forecasts currently resembling a coin toss.
That represents a sharp change from where traders stood just over a week earlier. CME data showed the chance of a rate increase at only 39.9% on 21 August. By 28 August, following Warsh’s speech at the Jackson Hole Economic Policy Symposium, the figure had risen to 57%, while expectations of a September rate cut had effectively disappeared.
Prediction markets remain slightly less convinced that policymakers will tighten. Polymarket traders put the chance of rates being held at 52%, compared with 48% for a 25-basis-point increase. More than $66.6m has been traded on that particular contract, while the once-popular wager on a rate cut now has odds of just 1%.
Kalshi is showing almost identical expectations. Its September Federal Reserve market, which has generated more than $23.8m in trading volume, places the probability of no change at 52%, against 48% for a quarter-point rise.
A separate Kalshi contract gives the Federal Reserve a 67% chance of increasing the federal funds rate at some point before 2027.
The dramatic shift in expectations followed Warsh’s keynote address in Jackson Hole. He stopped short of promising that rates would rise in September, but repeatedly highlighted persistent inflation and the Federal Reserve’s duty 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 said.
He also made clear that short-term interest rates remained the central bank’s main tool for achieving that objective.
The inflation figures he cited help explain why investors took the speech as a warning that rates could remain higher, or move higher again. The Federal Reserve’s preferred 12-month PCE inflation measure is running at 3.7%, while the six-month measure is higher still at 4.1%. Both are well above the central bank’s fixed 2% target, although some critics of the Federal Reserve believe that level may never be reached again.
Warsh also portrayed an economy that was still strong enough to withstand higher borrowing costs. Business investment is rising rapidly, particularly in the artificial intelligence (AI) sector. Profits across the S&P 500 have increased by more than 20% over the past year, while real consumer spending has grown by more than 2% over four quarters. Unemployment remains at 4.1%.
That combination is likely to concern those investors hoping for lower rates. An increase in the federal funds rate would tend to cool demand and reduce inflationary pressure, while continued economic growth and relatively firm employment would give policymakers more room to tighten policy without immediately damaging the labour market.
Warsh nevertheless declined to commit himself to a September increase. The deliberate ambiguity leaves traders to assess the data for themselves rather than receiving a firm signal from the Federal Reserve weeks before the meeting.
CME futures currently favour a hike, while Polymarket and Kalshi narrowly lean towards no change. Inflation and labour-market reports released before officials meet in mid-September could still determine which side prevails.
Away from the rate debate, bitcoin rose by 1.5% on Sunday to an intraday high of $78,960 before encountering resistance.
