Markets cut September hike odds to 60%

Markets pared back expectations for a Federal Reserve rate increase in September on Thursday, with pricing for the next policy meeting slipping below 60% after running near 70% earlier in the week. CME FedWatch said traders were still assigning a better-than-even chance of a hike, but the move marked a pullback from the more hawkish pricing that followed last week's Federal Open Market Committee meeting. FXEmpire linked the change in rate expectations to lower oil prices and a softer inflation case if energy costs remain contained. The Federal Reserve itself has not signaled any retreat from its recent stance, and several officials have continued to say rates may need to move higher. ### Why did September hike odds move lower on Thursday? (cmegroup.com) FXEmpire reported on Wednesday that hopes for progress in Iran-related talks pulled crude prices lower and reduced some of the inflation pressure embedded in rate markets. The article said gold rose as lower oil, lower Treasury yields and a weaker dollar all eased headwinds for the metal, while the same drop in energy prices cut into the case for an immediate additional Fed increase. (fxempire.com) CNBC reported on July 23 that September hike odds had climbed as oil prices rose during fighting involving the United States and Iran. Thursday's move was the reverse of that earlier trade: lower crude prices coincided with lower implied odds of tighter Fed policy. ### What are traders actually pricing now? CME Group says its FedWatch tool tracks the likelihood of changes in the federal funds target range using 30-day Fed Funds futures. (fxempire.com) A separate market tracker using those probabilities showed a roughly 59% chance of a 25-basis-point increase for the September 15-16 meeting as of August 1, with the balance centered on no change. (cnbc.com) CME's own FedWatch page, which was available on Thursday, showed the September meeting as the next scheduled decision and said the probabilities are derived from futures pricing rather than Fed guidance. That distinction matters because the market move reflects investor positioning, not a policy announcement from the central bank. ### Have Fed officials changed their message? (cmegroup.com) Minneapolis Fed President Neel Kashkari said on Wednesday that he thinks higher interest rates are needed now to bring down inflation and avoid steeper moves later, according to CNBC. Kashkari's comments followed last week's policy meeting, where Reuters reported that three Fed officials dissented in favor of an immediate increase. (cmegroup.com) Reuters said on July 31 that the dissenters argued inflation could remain stuck above the Fed's 2% target without higher short-term borrowing costs. That reporting indicates the internal debate has remained hawkish even as market pricing eased this week. ### What should investors watch next? September 15-16 is the date of the Fed's next policy meeting, according to CME FedWatch. (cnbc.com) Between now and then, the market's pricing for a hike is likely to continue reacting to oil prices, Treasury yields and public comments from officials including Kashkari and other regional Fed presidents. (cmegroup.com) (msn.com)