Fed rate hike odds near 72%

Kevin Warsh’s August 28 speech at Jackson Hole and Michael Barr’s September 1 remarks have left investors focused on whether the Federal Reserve will raise interest rates again at its September meeting. Warsh said at the Kansas City Fed symposium that policymakers “must be confident that underlying inflation is moving to our objective, clearly and at sufficient speed,” and added, “Otherwise, we have work to do.” Michael Barr, speaking Tuesday before the Second Chance Lending Forum in Washington, said he would support higher rates if inflation does not cool fast enough. Reuters reported that Barr said, “If inflation appears not to be moderating sufficiently, then I think we should act decisively to raise rates.” (federalreserve.gov) ### What did Warsh actually say in Jackson Hole? Kevin Warsh used his August 28 Jackson Hole speech to argue that the Fed should not relax until inflation is clearly returning to its 2% goal. In remarks published by the Federal Reserve Board, Warsh said the public and markets should expect “innovations in the conduct of policy at the Fed” aimed at delivering price stability alongside full employment. (kitco.com) Reuters, in its September 1 report on Barr’s comments, quoted Warsh’s line from Jackson Hole as: “We must be confident that underlying inflation is moving to our objective, clearly and at sufficient speed. Otherwise, we have work to do.” That language kept open the prospect of additional tightening rather than cuts. (federalreserve.gov) ### Why are traders talking about 68%, 66% or 72%? CME FedWatch says its probabilities are derived from 30-Day Fed Funds futures prices and are meant to show how traders are pricing upcoming Federal Open Market Committee decisions. CME says media should attribute those probabilities to “CME FedWatch.” Reuters reported on September 1 that financial markets were betting on a quarter-point increase from the current 3.50% to 3.75% target range at this month’s meeting. (kitco.com) Other reports circulating on September 1 and September 2 put the implied probability in a band from about 66% to roughly 72%, depending on the time of calculation and the model used. (cmegroup.com) ### What changed after Barr spoke on September 1? Michael Barr’s September 1 speech added a second explicit signal from a senior Fed official in less than a week. Barr said inflation “remains too high — and has been for over five years,” while also saying he could support waiting longer if incoming data give him confidence inflation is moderating on a path back to 2%. (kitco.com) Reuters said Barr also described the economy as performing solidly, with investment in artificial intelligence helping support growth and the labor market remaining stable. Those comments gave markets another reason to think the Fed sees room to tighten if inflation does not improve. ### How does a Fed hike get decided from here? (kitco.com) The Federal Reserve says the Federal Open Market Committee is the body that determines the stance of monetary policy and holds eight regularly scheduled meetings each year. The committee uses the federal funds rate as its main policy lever, and changes in that rate affect other short-term rates, longer-term borrowing costs and broader financial conditions. (kitco.com) The Fed’s policy rate is currently in a 3.50% to 3.75% range, Reuters reported, and traders are now positioned for the possibility of a quarter-point increase if inflation data do not improve before the meeting. ### When is the next decision point? CME FedWatch says the next FOMC meeting is in 14 days as of September 2, and the Federal Reserve’s FOMC page lists the committee’s regular meeting schedule and recent materials. (federalreserve.gov) The Fed says the committee reviews economic and financial conditions at each meeting before deciding the appropriate stance of policy. (kitco.com) September 15-16 is the next scheduled FOMC meeting, according to the Federal Reserve. That meeting, along with any inflation data released before it, will determine whether Warsh’s Jackson Hole warning becomes an actual rate increase. (federalreserve.gov) (cmegroup.com)