Fed Rate Hike Odds Surge to 86.3% on Core Inflation Surprise
The CME FedWatch tool now prices a 90% probability of a rate hike after August core CPI exceeded forecasts.
Market expectations for a Federal Reserve rate hike jumped to 86.3% on Friday. This shift followed the release of August Consumer Price Index data. The odds had stood at 60% earlier in the week. The increase reflects a hawkish pivot in economic consensus.
Core inflation rose 0.3% month-over-month in August. This figure exceeded the 0.2% forecast by analysts. Headline CPI increased 0.4% monthly and 3.4% annually. Energy prices drove the headline increase due to ongoing geopolitical tensions.
Core CPI data surprises markets
Sam Williamson, a senior economist at First American, called the core data a real surprise. He noted the figures add weight to a rate hike. The CME FedWatch tool showed odds climbing to 70% by Thursday. Oil prices topping 100 dollars per barrel contributed to this initial rise.
By midday Friday, the probability of a hike reached 86.3%. The tool also priced in a 25 basis point increase for October at 50.9%. A 50 basis point move carries a 42% likelihood. These figures indicate a strong market consensus for tighter monetary policy.
Fed officials show divided stance
The FOMC has held rates steady since cuts in late 2025. Three voting members supported a hike at the July meeting. Fed Chair Kevin Warsh acknowledged stubbornly elevated inflation. He made these remarks at the Jackson Hole Economic Symposium.
Governor Michael Barr urged the Fed to act decisively. Governor Christopher Waller preferred keeping rates unchanged. Waller stated he would consider a small adjustment if data came in hot. Chen Zhao of Redfin believes the recent data will push the committee toward a hike.
Consumer sentiment hits new lows
Consumer sentiment dropped to 47.8% in September. This represents a 7.5% decline from the previous month. The year-over-year drop is 13.2%. The University of Michigan reported these figures in its September 11 survey.
This reading is the second-lowest in the survey's history. Joanne Hsu, director of the Surveys of Consumers, cited fuel prices and trade tensions. She noted consumers expect greater pressure on their pocketbooks. The anticipated rate hike is largely priced into mortgage rates.
