Expectations that the Fed could raise interest rates at its September meeting have significantly increased following cautious statements from Fed Chairman Kevin Warsh about inflation. The probability of a rate hike in prediction markets has approached its highest level recently, and bond yields have also risen sharply.
Ahead of the Fed's monetary policy meeting on September 16th, market expectations are shifting rapidly. According to market analysis data, the probability of the Fed maintaining current interest rates is about 55%, while a 25 basis point rate hike is estimated at approximately 46%. The probability of a more significant rate hike is estimated at only about 1%.
The CME Group's FedWatch tool shows that investors have increased the probability of a rate hike at the September meeting to 55.7%. This represents an increase of approximately 20 basis points in just one day.
Warsh: No Significant Improvement in Inflation Trend Observed
Federal Reserve Chairman Kevin Warsh, speaking at the Jackson Hole symposium in Wyoming, noted that inflation remains high.
Warsh acknowledged that inflation data published this summer was more positive than expected but stated that it does not indicate a sustainable improvement in core inflation trends.
Warsh stated: "Although the inflation data published this summer turned out better than expected, it does not point to a substantial improvement in core trends."
The Fed Chairman also added that it is necessary to ensure that inflation is approaching the central bank's target level quickly and clearly enough.
Warsh made it clear that otherwise, the Fed might have to tighten monetary policy further, stating: "Otherwise, we have a lot of work ahead. This is our duty, our authority, and our responsibility."
However, Warsh did not give any direct hints about how the Fed will act at upcoming meetings, nor did he present clear frameworks on which interest rate decisions would depend based on economic data.
U.S. Treasury Bond Yields Rise Sharply
Following Warsh's speech, U.S. stock indexes rose, while the bond market faced selling pressure.
The yield on the two-year U.S. Treasury note, which is extremely sensitive to expectations regarding Fed interest rate policy, rose by about 8 basis points to 4.31 percent. Thus, the two-year bond yield reached its highest level since late July.
The rise in short-term bond yields indicates strengthening investor expectations regarding a possible tightening of the Federal Reserve's monetary policy in the near future.
Approximately two and a half weeks before the September meeting, new inflation and employment data are expected to be published, which are presumed to be crucial for determining the direction of interest rate expectations. If inflation remains higher than expected, the probability of an interest rate hike will increase, while a significant slowdown in price pressures could reinforce expectations that the Fed will keep interest rates unchanged.
*This is not investment advice.
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