A September Rate Hike Is Nearly 60% Priced In: What to Watch

Rate-hike expectations have surged

The probability of a Fed rate hike in September has reached 57.5%. Before Warsh's Jackson Hole speech, it was just 35.4%. A single speech raised the implied probability by about 22 percentage points.

This number is a vote cast with real money by traders around the world in interest-rate futures markets. It directly affects the dollar, gold and Treasury yields, and indirectly affects ordinary households through dollar deposits, overseas shopping and the cost of travel abroad.

What would happen if the Fed raised rates in September?

Historically, a rate hike has often been followed by a stronger dollar and higher Treasury yields, while gold has tended to come under pressure. If the Fed does not raise rates, market sentiment may ease, the dollar is more likely to weaken and gold may rebound, making overseas purchases and travel more affordable.

Where does the 57.5% probability come from?

The figure comes from CME interest-rate futures markets, where expectations for interest rates are traded. Traders take positions on the Fed's future policy path. Prices reflect their assessment of the September meeting, and converting those futures prices into probabilities produces the 57.5% figure.

This indicator is highly sensitive. Current prices already incorporate expectations for the September 4 payrolls report. Payrolls, inflation or an official's speech can cause a sharp change if they surprise the market. The 57.5% reading is only a snapshot, far from a final outcome.

The Fed's policy dashboard is changing

At Jackson Hole on August 28, Fed Chair Warsh made a key point: money matters.

That means considering not only the price of money, or the level of interest rates, but also its aggregate supply: broad money, measured by M2.

For more than two decades, Fed policy has focused primarily on interest rates, inflation and employment. It has paid close attention to how expensive money is, while M2 has become a secondary reference. The amount of money in circulation has no longer been a central basis for policy. Warsh's remarks indicate that M2 is returning as an important variable to watch.

The last time the Fed treated monetary aggregates as a core policy tool was during Volcker's battle against high inflation in the 1980s, when strict control of money supply helped contain inflation.

This does not mean policy will immediately change course completely or recreate the old 1980s model. But the dashboard through which the Fed observes the economy has changed, and its broader policy framework may evolve. A separate article will examine the deeper implications.

Key dates to watch

September 4, August payrolls: an overheated labour market would raise hike expectations; a cooling labour market would lower them.

September 11, the PCE price index: a rebound in inflation would increase pressure to raise rates.

September 16, the FOMC meeting and dot plot: the Fed's official guidance on the interest-rate path.