Invest10 publishers2 min readPublished Updated
The FOMC decides next week before its preferred inflation gauge for August arrives
Headline inflation held at 3.4% in August while core eased to 2.4%, and the priced odds of a quarter-point hike on Wednesday ran anywhere from about 70% to better than 90% depending on which publisher was reading the tape.
The Investor · Invest desk
What happened
- Market odds of a Federal Reserve rate increase by the September 15-16 meeting rose to 78.5% from 54% a day earlier, according to pricing cited in a Wall Street Journal report.
- The Journal reports that expectations now include an increase at the upcoming meeting and at least three further hikes by June.
- The probability of an increase by the October meeting has climbed to 81.5%, the second dated reading in the report.
Compiled by The InvestorSomething wrong?How this is made
Why it matters
- exposure A 24.5-point move in one session marks anyone who sold the September hike at 54% against a far dearer number, and the loss lands on whoever wrote that side.
- constraint With 3 points between the September and October readings, the market has priced almost nothing for the committee waiting a single meeting, so a hold next week disturbs both dates at once.
- decision With a hike next week already near four-fifths priced, the committee's remaining room to move markets sits in the statement language the report says will be read for signs of further increases.
The effective federal funds rate is 3.63%, twelve basis points under the top of the Fed's 3.50% to 3.75% target range [3][14]. The odds on next week are what moved: 78.5% for a hike by the September 15-16 meeting, up from 54% a day earlier, or about 1.45 times the previous reading [5][11].
The Journal's count, as relayed by cryptobriefing, is one increase at the upcoming meeting and at least three more by June [2][16]. The report does not specify the size of any of them. Four moves at the customary quarter point add 100 basis points, and the range would finish June at 4.50% to 4.75% [13].
The two numbers are different kinds of evidence. The 78.5% is a price, quoted to a decimal and revised inside a day; the count of three more by June is a description of what market participants expect, and it has to survive every meeting between now and then [5][1][2]. Cryptobriefing attributes the swing to recent economic indicators without naming which ones [8][15]. The page closes with a sign-up line for prediction-market analysis [17].
Whether investors have actually moved money is a separate question, and a probability series cannot answer it; that takes yields, fund flows or positioning. The record here is two dated odds and a policy rate [5][3].
In my view the September probability is the part of this priced tightly enough to trade against, and the count through June is the part that gets revised most. The counter is straightforward: if the data that moved the odds this week keeps printing the same way, June becomes the anchor and September is only its first leg [8]. Either way the test is dated. If the committee holds on September 15 or 16 with 78.5% priced going in, the series was wrong about the meeting it was surest of [5].
What to watch
- Whether the same probability series retraces toward 54% as fast as it climbed.
- The inflation and unemployment prints the report says will shape expectations, and what they do to the count beyond next week.
- Where the October probability settles once next week's decision is on the record.