Markets pull September hike odds to 56%

The implied market odds of a Federal Reserve rate increase in September fell to about 56% on Wednesday after softer U.S. data and lower oil prices eased some inflation pressure. FXEmpire reported that pricing had dropped below 60%, down from nearly 70% at the start of the week, while VT Markets put the probability at 56%. The move came even as two Federal Reserve officials, Kansas City Fed President Jeff Schmid and Minneapolis Fed President Neel Kashkari, said this week that rates still need to move higher. Traders are now looking to Friday’s U.S. nonfarm payrolls report for the next test of that view. ### Why did September hike odds move lower this week? Weak U.S. labor data and falling crude prices drove the repricing. VT Markets said soft data, including weak ADP employment figures, reduced the case for another near-term rate increase, while lower oil prices cut some of the inflation pressure that had been feeding expectations of tighter policy. FXEmpire said the shift pushed September hike odds below 60% from nearly 70% earlier in the week. The same report said talk of an Iran-related deal helped pull crude lower, which in turn took pressure out of the rates trade and weighed on Treasury yields. ### Where does the 56% figure come from? (vtmarkets.com) VT Markets on August 5 said market pricing showed a 56% chance of a September increase. The report tied that level directly to weaker U.S. data and lower energy prices, and said the next major catalyst would be Friday’s payrolls report. (fxempire.com) That figure aligns with the broader move described by FXEmpire, which said expectations for a September hike had retreated materially over the course of the week. Both reports described the change as a pullback in tightening expectations rather than a full shift to an easing outlook. (vtmarkets.com) ### What did Schmid and Kashkari say? Jeff Schmid said on August 4 that “some sort of monetary policy tightening is needed” to return inflation to the Fed’s 2% target. Reuters reported that the Kansas City Fed president said the economy appeared to be performing well “with the notable exception of inflation,” which he described as still too high. (fxempire.com) Neel Kashkari said on August 5 that “now is the time to start slowly moving up” interest rates. CNBC reported that the Minneapolis Fed president, who dissented at last week’s policy meeting, said he favored beginning gradual increases rather than waiting and risking a more forceful tightening cycle later. (money.usnews.com) ### Does lower hike pricing mean markets now expect cuts? Inflation remains above the Fed’s 2% target, and VT Markets said policy could still stay restrictive even with lower oil prices. The report described the repricing as a softer case for more tightening, not a signal that cuts were imminent. (cnbc.com) Schmid’s and Kashkari’s comments also point the same way. Both officials argued this week that inflation remains a problem and that higher rates may still be needed, even as market pricing became less aggressive after the latest data. ### What are traders watching next? (vtmarkets.com) Friday’s U.S. nonfarm payrolls report is the next scheduled event traders are using to judge whether September odds keep falling or move back up. VT Markets said the payrolls data could trigger a major move in the dollar and in rate expectations, especially after the weaker ADP reading. (money.usnews.com) The September Federal Open Market Committee meeting remains the focal point for the next policy decision. Between now and then, incoming labor and inflation data will shape whether the market stays near a 56% implied probability or moves back toward the higher levels seen earlier this week. (fxempire.com) (vtmarkets.com)