FedWatch Turns Hawkish as September Rate Hike Odds Hit 57%

Attention is now focused on the Federal Reserve's Sept. 16 federal funds rate decision. CME's FedWatch Tool, which translates federal funds futures trading into implied policy probabilities, assigns a 57% chance to a 25-basis-point hike that would lift the target range to 3.75%-4%. Holding at the current 3.5%-3.75% range carries just 43%. Uncertainty remains substantial, and forecasting the FOMC's decision is currently little better than drawing straws.

FedWatch Flips as September Hike Bets Catch Fire

The shift looks more significant when compared with where traders stood barely a week earlier. CME data put the probability of a hike at only 39.9% on Aug. 21. By Aug. 28, following the Jackson Hole speech, it had flipped to 57%, while bets on a September rate cut had essentially been wiped off the board. Jackson Hole, the Fed's annual Economic Policy Symposium hosted in Wyoming, has long served as a venue where chairs and senior officials signal policy direction, which is one reason a single keynote can move rate expectations this sharply.

Prediction markets have not fully embraced the hawkish trade. As of this weekend, Polymarket traders put a Fed hold at 52% and a 25-basis-point hike at 48%. More than $66.6 million has changed hands on this particular wager, while the once-familiar rate-cut bet now commands odds of just 1%.

On the prediction marketplace Kalshi, traders face nearly the same coin toss-style odds. Its September Fed market, with more than $23.8 million in volume, puts no change at 52% against 48% for a quarter-point hike. A separate Kalshi contract gives the Fed a 67% chance of hiking the federal funds rate sometime before 2027. The divergence between futures markets, which lean toward a hike, and prediction markets, which lean toward a hold, highlights how little agreement exists even among traders putting real money on the outcome.

Warsh Puts Sticky Inflation Back in the Crosshairs

The data shifted sharply after Warsh's Jackson Hole Economic Policy Symposium keynote, in which he carefully avoided promising a September hike while repeatedly returning to stubborn inflation and the Fed's responsibility to bring prices under control.

"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 stressed. He also made clear that short-term interest rates remain the Fed's main tool for getting there.

The figures Warsh laid out explain why traders heard a hawkish message. The Fed's preferred 12-month PCE inflation gauge is running at 3.7%, while the six-month reading sits even higher at 4.1%. Neither number is remotely comfortable beside the central bank's fixed 2% target, and some Fed critics believe the 2% target will never be reached again.

Warsh also described an economy that gives the Fed little reason to fear higher rates. Business investment is climbing rapidly, particularly in the artificial intelligence (AI) sector, S&P 500 profits are up more than 20% over the past year, and real consumer spending has gained more than 2% over four quarters. Unemployment remains at 4.1%.

Markets Stare Down a September Coin Toss

That combination is exactly what makes September uncomfortable for federal funds rate doves. A higher fed funds rate cools demand and inflation, and an economy still producing solid growth and employment gives policymakers considerably more breathing room to tighten without immediately breaking the labor market. The fed funds rate also serves as a benchmark that filters through to consumer borrowing costs such as credit cards, auto loans and adjustable-rate mortgages, which is why even a quarter-point move is watched far beyond the futures markets.

Warsh still refused to commit to a hike, saying: "I stand here today committed to a discipline, not to a decision."

The message was deliberate: markets can handicap September however they want, but the Fed does not intend to hand traders the answer weeks before the meeting. For investors, September has become a genuine fifty-fifty proposition with real money behind both sides. CME futures favor a hike, while the prediction markets Polymarket and Kalshi narrowly lean toward a hold. Inflation and labor reports now carry even more weight, and either could tip the scales before Fed officials meet in mid-September.