Market Odds for September Fed Rate Hike Drop to 31%

Market expectations for a September interest rate hike by the Federal Reserve System have dropped sharply from 60% in early August to 31%. This shift follows a series of economic indicators suggesting a cooling U.S. economy, including a 0.6% unexpected contraction in July retail sales and a decline in annual consumer inflation to 3.4%.

Earlier in August, the central bank faced conflicting data. While the Institute for Supply Management reported the highest manufacturing index since May 2022, the Bureau of Labor Statistics noted that June energy prices remained 15.7% higher year-over-year. These persistent costs initially provided a basis for further tightening to reach the bank's 2% inflation target.

Recent data has pushed investors toward a more dovish outlook. The Producer Price Index fell to 4.7%, and the U.S. economy reported a loss of 23,000 non-farm payroll jobs in July. In response, the 2-year Treasury yield fell by approximately 20 basis points since July 23. Markets now anticipate only one rate hike by December, down from previous expectations of two hikes before the end of 2026.