The Fed’s September call rests on one inflation report

Federal Reserve Chair Kevin Warsh delivered a hawkish address at Jackson Hole on 28 August⁹. His comments there caused the odds of a rate hike to rise¹¹, and the central bank now faces a growing risk of delivering a September increase after the chair signalled a more hawkish stance¹⁰.

Odds of a September hike on the CME FedWatch tool jumped after Jackson Hole, then fell back after Fed Governor Christopher Waller sounded more open to holding rates steady². Investors are now pricing slightly above 60 percent odds of a move⁶. The dollar jumped as traders weighed the meeting¹.

Where the committee stands

Cleveland Fed President Beth Hammack said on Friday that it is time to act on inflation⁶. She stated her case at the end of the week and is one of a group of policymakers pressing for tightening⁷.

The other side of the committee has not conceded. Waller has sounded more open to holding rates where they are², and the reluctance of New York Fed President John Williams and Waller to pre-commit to either a September or a subsequent hike is itself a source of market uncertainty⁵. Waller has said the coming inflation report will help him determine whether to hike⁴.

What to watch

August economic data is seen as the key input to whether the Fed hikes at its 15 to 16 September meeting¹. If the consumer price index shows signs that inflation is slowing, the Fed may choose to keep interest rates at current levels³. That single release, rather than any further speech, is what the market is waiting on.

Prediction-market traders on Polymarket and Kalshi have raised their rate-hike odds as the inflation report approaches⁴. Equities have already started to price the risk: the Nasdaq faces its first key resistance with the Federal Reserve a key source of uncertainty⁹, and one review of 36 years of history argues the stock market would not be happy, at least initially, with a hike on 16 September⁸.

Income portfolios would not move as one block. Warsh’s warning that a hike could be coming has already rattled investors, and some dividend stocks would be hurt by a rise while others could actually win¹¹. Bond and currency desks, meanwhile, are watching what commentators have started calling the Warsh shadow rate as a way to read how far the chair intends to go¹⁰.