Five weeks ago, the September rate hike was close to a done deal. It is now a long shot, and the case for it has three days left to make itself.
The Hike Trade Has Quietly Unwound
In July, fed funds futures were pricing in roughly an 82% likelihood that the Federal Reserve would raise borrowing costs at its September meeting. By early August, J.P. Morgan Wealth Management still had a 25-basis-point increase as its base case, with markets assigning about a 65% chance.
The CME FedWatch tool now shows roughly 30% odds of a September hike, with a hold at the current 3.50%-3.75% target range carrying close to 70%.
The July FOMC meeting is what started the repricing — in the other direction. "The combination of a slower-than-expected normalization of supply chains around the Strait of Hormuz and market questioning of inflation-fighting credibility after the July FOMC meeting has lowered the bar for a rate hike in September," J.P. Morgan chief investment strategist Phil Camporeale wrote on Aug. 5.
Then the labor data arrived.
Payrolls Did the Rest
The Bureau of Labor Statistics reported on Aug. 7 that nonfarm payrolls fell by 23,000 in July, against economist expectations closer to 83,000. Revisions were worse than the headline: May was cut by 66,000 and June by 37,000, leaving the two months a combined 103,000 lower than previously reported.
The unemployment rate ticked down to 4.1% from 4.2%, but the labor force participation rate slipped to 61.4%, a level not seen in more than five years. Average hourly earnings rose two cents, pulling the 12-month gain to 3.2% — the softest since May 2021.
That is not the wage pressure a central bank hikes into.
Wednesday Is the Test
The Bureau of Economic Analysis releases July personal income and outlays Wednesday at 8:30 a.m. ET. Core PCE, the Fed's preferred gauge, ran 3.3% year over year in June, down from 3.4% in May. The Cleveland Fed's nowcast points to roughly 3.29% for July, and Oxford Economics projects core holding at 3.3% with headline PCE easing to 3.6% from 3.7%.
Nvidia reports fiscal second-quarter results after the close the same day, giving the market an inflation print and its largest AI bellwether inside a single session.
Goldman: Still Too Hawkish
Goldman Sachs chief economist Jan Hatzius has argued the market has this backwards. "We still think market pricing for the funds rate is too hawkish," he wrote, adding that "under our baseline economic forecasts, the inflation news is more likely to improve further than to deteriorate anew as the year progresses." Goldman expects the Fed to hold at 3.50%-3.75% through 2026 and defer cuts to 2027.
Not everyone at the Fed agrees. July's decision came on a 9-3 vote, with Cleveland's Beth Hammack, Minneapolis' Neel Kashkari and Dallas' Lorie Logan all dissenting in favor of a quarter-point increase.
Warsh Closes the Week
The Kansas City Fed's Economic Policy Symposium runs Aug. 27-29 at Jackson Lake Lodge under the theme "Financial Innovation: Implications for Payments and Policy," drawing roughly 120 officials from more than 70 countries. Chair Kevin Warsh delivers his first keynote as chair Friday.
Bloomberg Economics framed his dilemma as a choice between using "the prime-time opportunity to reassure markets the Fed has a plan to bring down inflation" or doubling down on his campaign to strip back forward guidance. Warsh has said he wants the speech to frame the big questions — language that points away from a September signal.
The bond market is not waiting patiently. The 10-year Treasury yield eased to about 4.72% Monday, while the 30-year touched 5.26% last week, near two-decade highs. Long rates have climbed even as hike odds have fallen, which is its own message about credibility.
Sources: Bureau of Economic Analysis, Bureau of Labor Statistics, CNBC, J.P. Morgan Wealth Management via Chase, Goldman Sachs via Yahoo Finance, Federal Reserve Bank of Kansas City, Bloomberg via Yahoo Finance, Quartz, Trading Economics