Date: August 25, 2024

CME FedWatch Data Point: Probability of Fed Keeping Rates Unchanged in September at 58.6%

Hook: The Probability That Isn't What It Seems

The CME FedWatch tool currently prices a 58.6% probability that the Federal Reserve will hold rates steady at the September FOMC meeting. The remaining 41.4% is priced for a 25-basis-point hike.

Let me be precise about what this means.

This is not a market that has concluded the tightening cycle is over. This is a market that is split down the middle on whether the most aggressive rate-hiking campaign in four decades has one more move left. A 58.6% probability is not certainty. It is not even a strong consensus. It is a coin flip with a slight bias.

The data reveals something more interesting when you extend the timeline. The CME FedWatch tool prices a 46.0% probability of a cumulative 25bp hike by October. That means the market sees a substantial chance that the Fed skips September but delivers in October or November. This is not a "pause." This is a "hawkish skip" — a temporary deferral, not a cessation.

The blockchain equivalent: a validator that misses one block but remains active in the consensus set. You do not assume the validator has gone offline. You assume it will propose again.

Code does not lie; intent does. The market's pricing is the code. The intent behind it is the fear of resurgent inflation.

Context: The Macro Ledger

To understand what this probability distribution means, you need to understand where we are in the cycle.

The Federal Reserve has raised rates from near-zero to a range of 5.25%–5.50% since March 2022. That is 525 basis points of tightening in roughly 18 months. The fastest hiking cycle since the 1980s. The stated goal was to bring inflation from a peak of 9.1% (June 2022 CPI) back to the 2% target.

By mid-2024, headline CPI had fallen to around 3.0%. Progress was made. But the last mile is always the hardest. Core inflation — which strips out food and energy — has proven stickier. Services inflation, driven by shelter costs and wage growth, remains elevated.

This is where the 58.6% probability lives. It is the market's acknowledgment that the Fed has made progress, but it is not convinced the job is done.

Consider the structure of the current market environment. Equities are near all-time highs. Credit spreads are tight. The labor market remains resilient, with unemployment near historic lows at 3.5%–4.0%. GDP growth in Q2 2024 came in at 2.8% annualized — far from recession territory.

This is not a classic late-cycle setup. This is an environment where the economy is absorbing high rates with surprising resilience. And that resilience is precisely what keeps the 41.4% hike probability alive.

The blockchain analogy: a network with high transaction throughput and low fees, but the mempool is filling. The question is whether the block size needs to change or whether the current parameters are sufficient.

Verify the hash, trust no one. The data here shows an economy that has not broken. The market is asking whether the Fed needs to break it to finish the inflation fight.

Core: The Systematic Teardown

Let me break down the probability distribution the way I would break down a smart contract audit. Line by line. Variable by variable.

The September Decision

The September 2024 FOMC meeting is scheduled for September 17-18. The market prices:

• Hold rates unchanged: 58.6%
• Hike 25bp: 41.4%

This distribution is remarkable. For context, in early August, the probability of a September hike was below 20%. A series of stronger-than-expected economic data points — retail sales, jobless claims, and most importantly, the July CPI report showing a 0.2% month-over-month increase — has shifted the distribution meaningfully.

The market is now pricing a significant chance that the Fed's "data-dependent" stance translates into action.

What this means in practice: If you are a portfolio manager, you cannot position for a hold with any degree of confidence. You must hedge the hike scenario. That hedging activity itself creates market dynamics — upward pressure on short-term yields, downward pressure on risk assets.

The October Complication

Here is where the data gets interesting. The CME FedWatch tool shows:

• Cumulative 25bp hike by October: 46.0%
• Cumulative 50bp hike by October: 11.0%

The October meeting is scheduled for October 29-30. The gap between the September hold probability (58.6%) and the October cumulative hike probability (46.0%) reveals something crucial.

The market believes the Fed is more likely to hike in October than to hike in September. This is the "hawkish skip" scenario. The Fed skips September to gather more data, then delivers a hike in October or November if the data supports it.

This is not a market that believes the cycle is over. This is a market that believes the cycle is extended, with the final hike deferred but not abandoned.

From my audit experience: This is like reviewing a smart contract where the developer has added a time-lock mechanism. The function call is not executed immediately — it is queued for a later block. But the transaction is in the mempool, and the intent is clear.

The November Wildcard

The November meeting (November 6-7, 2024) is particularly notable because it occurs after the US presidential election. The Fed has historically avoided dramatic policy shifts in the immediate aftermath of elections, but it has not shied away from rate changes if the data demands action.

If the Fed skips September and October, the November meeting becomes a live possibility for a hike. This extends the "hawkish pause" narrative into Q4 2024.

The structural point: The market is pricing a Fed that wants to stop but cannot confirm the job is done. This is not a dovish stance. It is a reluctant hawkishness — a desire to be done, constrained by data that will not cooperate.

The Term Structure Signal

Look at the yield curve. Two-year Treasury yields are trading near 4.0%–4.1%. Ten-year yields are around 4.2%. The curve is barely inverted — if at all. This is a significant shift from the deep inversion (over 100bp) seen throughout 2023.

A normalizing yield curve typically signals one of two things:

1. The market expects the Fed to cut rates soon, pulling short-term yields down.
2. The market expects long-term rates to rise due to term premium expansion — i.e., fiscal concerns.

The current pricing suggests a mix of both. The market is not pricing aggressive cuts in the near term. The September hold probability of 58.6% and the October hike probability of 46.0% imply that the Fed will remain at current levels or higher through the end of 2024.

The takeaway: The yield curve is telling you that "higher for longer" is the base case. Any deviation requires a significant data surprise.

The Liquidity Dimension

Let me address a variable that does not get enough attention: the Federal Reserve's balance sheet runoff, or quantitative tightening (QT).

The Fed has been reducing its balance sheet by up to $95 billion per month. This process drains liquidity from the financial system. It operates in the background, independent of the fed funds rate.

The interaction between QT and the rate path is critical. If the Fed holds rates steady but continues QT, the overall policy stance is still tightening. Liquidity is being removed from the system, which puts upward pressure on funding costs.

This is the hidden variable in the 58.6% probability. A hold in September is not a neutral stance. It is a tightening stance via the balance sheet channel. The market is pricing this — but it is not explicitly discussed in the headline probability.

Silence is the only honest ledger. The QT channel is the silence in the data. It is not visible in the FedWatch tool, but it is present in the market's behavior.

The Market Impact Matrix

Let me trace through the implications of this probability distribution across asset classes.

Equities

The 41.4% September hike probability is a weight on risk assets. Equity markets have rallied in 2024 on the assumption that the Fed would begin cutting rates in the second half of the year. That assumption has been repeatedly pushed back.

The S&P 500 trades near 5,600–5,700. This is a valuation that assumes a soft landing — moderate growth, declining inflation, and eventual rate cuts. The 58.6% hold probability and 41.4% hike probability are not consistent with a soft landing. They are consistent with a "no landing" scenario — growth remains resilient, inflation remains sticky, and the Fed cannot cut.

If the Fed hikes in September, expect a 5%–10% correction in equities. The market is not positioned for a hike. The 41.4% probability suggests significant hedging demand, but positioning data shows that institutional investors remain overweight equities.

The structural issue: Equity valuations are built on a discount rate assumption that the Fed will cut rates. If that assumption is wrong — if the Fed holds or hikes — the discount rate rises, and multiples compress.

Fixed Income

The short end of the curve is most sensitive to the rate path. Two-year yields will remain elevated as long as the September hike probability stays above 30%–40%.

The long end is more complicated. Ten-year yields are influenced by:

• The expected path of short-term rates
• Term premium (compensation for holding long-duration risk)
• Inflation expectations
• Fiscal supply dynamics

The Treasury's quarterly refunding announcements have become market-moving events. The US government is running a deficit of approximately $1.5–1.8 trillion annually. This requires significant debt issuance, which puts upward pressure on long-term yields.

The interaction: If the Fed holds rates steady but the Treasury issues a large volume of long-duration debt, the term premium expands, and long-term yields rise. This creates a steepening yield curve — a bear steepener — which is typically negative for risk assets.

From my audit experience: I have seen projects fail because they ignored the interaction between protocol parameters. The same principle applies here. You cannot analyze the Fed's rate path in isolation from fiscal policy and balance sheet dynamics.

Foreign Exchange

The dollar is supported by the relative rate differential. If the Fed holds rates at 5.25%–5.50% while the European Central Bank and the Bank of England begin cutting, the dollar strengthens.

The ECB has already signaled a potential cut in September. The Bank of England cut rates in August 2024. This creates a rate differential that favors the dollar.

The dollar index (DXY) has significant upside risk if the Fed delivers a hawkish hold in September. A move above 105–106 is possible if the market interprets the hold as a precursor to an October hike.

Commodities

Higher rates for longer are negative for gold. The opportunity cost of holding a zero-yield asset increases when rates are high. Gold has been rangebound between $2,300 and $2,500 per ounce in 2024, and a hawkish Fed will keep it in that range or push it lower.

Oil is more complex. The geopolitical risk premium has been elevated due to tensions in the Middle East and the Russia-Ukraine conflict. But higher rates suppress demand expectations. The net effect depends on the supply side — OPEC+ production decisions, US shale output, and geopolitical developments.

Contrarian: What the Bulls Got Right

Now let me address the counterargument. There is a credible bull case for a more dovish outcome than the current pricing suggests.

The Labor Market Is Cooling

The Sahm Rule — which signals a recession when the three-month moving average of the unemployment rate rises 0.5 percentage points above its 12-month low — has been flashing warnings. The unemployment rate has risen from 3.4% to 4.3% in 2024.

This is a meaningful deterioration. If the labor market is genuinely cooling, the Fed's mandate to maintain maximum employment becomes a constraint on further tightening.

The data point: Nonfarm payrolls have been revised downward significantly in 2024. The BLS has revised Q1 2024 job creation down by nearly 200,000. The labor market is weaker than the headline numbers suggest.

Inflation Is Decelerating

The CPI data shows a clear deceleration trend. Headline CPI has fallen from 9.1% to approximately 3.0%. Core CPI is around 3.2%. The trajectory is downward.

The Fed's preferred inflation gauge — the PCE price index — is running even lower, around 2.5%–2.6%. This is close to the 2% target.

The argument: If inflation is converging to target, the Fed does not need to hike further. It needs to hold and let the lagged effects of past tightening do the work.

The Policy Transmission Lag

Monetary policy operates with a lag of 12–18 months. The rate hikes delivered in 2022 and 2023 are still transmitting through the economy. The full impact has not been felt.

This is the strongest argument for a hold. The Fed risks overshooting — tightening too much and causing an unnecessary recession — if it continues to hike without waiting for the lagged effects to materialize.

The Balance of Risks Has Shifted

In 2022 and 2023, the primary risk was inflation running too hot. In 2024, the risk has shifted. The labor market is cooling, growth is slowing, and the risk of overtightening is now significant.

The two-sided risk: The Fed must balance the risk of premature easing (which could reignite inflation) against the risk of overtightening (which could cause a recession). The 58.6% hold probability suggests the market sees these risks as roughly balanced, with a slight bias toward inaction.

Complexity is often a disguise for theft. In this case, the complexity of the data is a disguise for uncertainty. The market does not know the answer, and neither does the Fed. The 58.6% probability is a reflection of genuine uncertainty, not a confident prediction.

The Critical Data Points Ahead

The market's pricing will be tested by a series of data releases in the coming weeks. Let me lay out the key signals to track.

August Nonfarm Payrolls (September 1, 2024)

This is the most important data point before the September FOMC meeting. The consensus expectation is for approximately 170,000 new jobs. A print above 250,000 would be a hawkish signal — it would suggest the labor market remains too tight for the Fed to stand pat. A print below 100,000 would be dovish — it would suggest the labor market is cracking.

The wage component matters more than the headline number. Average hourly earnings are running at approximately 3.6%–4.0% year-over-year. If wage growth accelerates to 4.5% or higher, the "wage-price spiral" narrative gains traction, and the September hike probability will spike.

August CPI (September 13, 2024)

The CPI data will be released five days before the FOMC decision. This is the final major data point the Fed will see before voting.

The consensus expectation is for headline CPI to remain around 3.0% and core CPI to be approximately 3.2%. The critical threshold is the month-over-month change. A 0.3% or higher month-over-month core print would be a hawkish signal.

The shelter component is the key variable. Owner's equivalent rent (OER) accounts for approximately 25% of the CPI basket. If shelter costs continue to decelerate — as they have been doing — the CPI will trend lower. If shelter costs reaccelerate, the inflation fight becomes more difficult.

Jackson Hole Symposium (August 22-24, 2024)

Chair Powell's speech at Jackson Hole is a critical communication event. He has historically used this platform to signal major policy shifts.

The market will parse every word for clues about the September decision. If Powell emphasizes the progress on inflation and the cooling labor market, the September hold probability will rise. If he emphasizes the need to "stay the course" and "remain vigilant," the hike probability will rise.

Treasury Auction Schedule

The Treasury's quarterly refunding announcement in early August set the issuance schedule for the coming quarter. The market is watching for the mix of short-term and long-term debt issuance.

If the Treasury increases long-duration issuance, the term premium expands, and long-term yields rise. This creates a bear steepener that could negatively impact risk assets even if the Fed holds rates steady.

The Signal Tracking Framework

Let me give you a concrete framework for tracking the evolution of this probability distribution.

Primary Signals (P0)

• August Nonfarm Payrolls (September 1): The single most important data point before the September meeting. A print above 250,000 or wage growth above 0.4% month-over-month is a hawkish signal.
• August CPI (September 13): The final data point before the decision. A core CPI print above 0.3% month-over-month is a hawkish signal.

Secondary Signals (P1)

• Powell's Jackson Hole Speech (August 24): A hawkish tone will shift the probability distribution immediately.
• Jobless Claims Weekly Data: Sustained low claims indicate labor market resilience.
• Retail Sales Data: Strong consumer spending supports the "no landing" scenario.

Tertiary Signals (P2)

• ISM Manufacturing and Services PMIs: Service sector resilience supports the case for higher rates.
• 10-Year Treasury Yield: A sustained break above 4.3% indicates the market is pricing higher-for-longer.
• Oil Prices: Brent above $90/barrel would add to inflation concerns.
• Atlanta Fed GDPNow Model: A GDP estimate above 3.0% for Q3 would support the "no landing" scenario.

The Systemic Risk Assessment

Let me now assess the systemic risks embedded in this probability distribution.

Risk 1: Inflation Reacceleration

Probability: Low to Moderate Impact: High

If inflation reaccelerates — driven by energy prices, wage growth, or supply chain disruptions — the Fed would be forced to resume hiking. This would invalidate the current market pricing and cause significant repricing across all asset classes.

The trigger: A combination of rising oil prices, accelerating wage growth, and sticky shelter costs could push CPI back above 4%.

Risk 2: Labor Market Crack

Probability: Low to Moderate Impact: High

If the labor market deteriorates rapidly — with unemployment rising above 5% and payrolls turning negative — the Fed would be forced to pivot to cuts. This would be a different type of repricing — not a hawkish repricing but a recession-driven repricing.

The trigger: A combination of weakening payrolls, rising unemployment claims, and declining consumer confidence.

Risk 3: Policy Error

Probability: Moderate Impact: High

The Fed could make either mistake — hiking too much and causing a recession, or holding too long and allowing inflation to reaccelerate. Both errors are possible given the genuine uncertainty about the economy's trajectory.

The trigger: The Fed's decision will be based on incomplete data. The September meeting will occur before the August CPI data is released, meaning the Fed will vote on a data set that is missing a key input.

Risk 4: Fiscal-Monetary Divergence

Probability: Moderate Impact: Medium

The Fed's monetary policy and the Treasury's fiscal policy are on divergent paths. The Fed is trying to tighten financial conditions while the Treasury is running a large deficit. This divergence creates a structural upward bias in long-term yields.

The trigger: If the Treasury announces a larger-than-expected long-duration auction calendar, the term premium will expand.

The Positioning Playbook

Given this probability distribution, here is how I would position.

Conservative Positioning

• Duration: Remain short duration. Two-year Treasury yields will remain elevated as long as the September hike probability is above 30%.
• Equities: Maintain a defensive tilt. The risk of a hawkish surprise is real, and the equity market is not positioned for it.
• Dollar: Hold a long dollar position. The rate differential supports the dollar.

Opportunistic Positioning

• If the September hike probability rises above 60%: This is a signal that the market has shifted to a hawkish regime. Position for higher yields and a stronger dollar.
• If the September hold probability rises above 75%: This is a signal that the market has become confident in a hold. Position for a relief rally in risk assets.

The Key Threshold

The critical threshold is whether the September hike probability crosses 50%. If it does, the market has shifted from "hawkish pause" to "active tightening." This would trigger a significant repricing.

The Structural Conclusion

Let me be direct about what the 58.6% probability means.

It means the market does not know what the Fed will do. It means the data is genuinely mixed — strong enough to support a hike, weak enough to justify a hold. It means the market is pricing uncertainty, not certainty.

This is the most important insight: The market's pricing is not a prediction. It is a probability distribution — a reflection of the market's collective uncertainty. And uncertainty is the primary driver of volatility.

The market's 58.6% hold probability and 41.4% hike probability are a fragile consensus. Any significant data surprise — a hot CPI print, a weak jobs report, a hawkish Powell speech — will shatter this consensus and trigger a rapid repricing.

The blockchain analogy is apt: The current market is like a network that is approaching a consensus rule change. The community is split. The outcome depends on the next few blocks. And the market is pricing both outcomes because it cannot determine which one will win.

Truth is found in the source code. The source code here is the economic data. And the data is genuinely ambiguous.

The Forward-Looking Judgment

Here is my assessment of the most likely paths forward.

Path 1: The Hawkish Hold (40% Probability)

The Fed holds rates steady in September but delivers a hike in October or November. This is the "hawkish skip" scenario. It is consistent with the 46.0% October hike probability.

Market impact: Short-term yields rise, the dollar strengthens, and equities correct 5%–10%. The market reprices from "peak rates" to "higher for longer."

Path 2: The Extended Hold (35% Probability)

The Fed holds rates steady in September and signals that it needs more time to assess the data. This is the "patient" scenario. It is consistent with a Fed that is genuinely data-dependent and unwilling to commit.

Market impact: Equities rally modestly, yields remain rangebound, and the dollar stabilizes. The market begins pricing rate cuts for 2025.

Path 3: The Surprise Hike (25% Probability)

The Fed delivers a 25bp hike in September, citing sticky inflation and a resilient labor market. This is the "hawkish surprise" scenario.

Market impact: Significant repricing across all asset classes. Equities correct 5%–10%, yields spike, and the dollar surges. The market reprices to a higher terminal rate.

The Final Word

The 58.6% probability of a September hold is not a confident prediction. It is a fragile consensus that could break in either direction.

The market is not telling you what will happen. It is telling you what the market believes is possible. And the range of possibilities is wide — wider than the headline probability suggests.

The data that will resolve this uncertainty is coming. The August jobs report, the August CPI report, and Powell's communication will determine which path the Fed takes. And the market will react violently to any deviation from expectations.

Ponzi schemes leave trails in the data. So do monetary policy errors. The trail here is in the yield curve, in the probability distribution, and in the economic data. The question is whether the market is reading the trail correctly.

Verify the hash, trust no one. The hash is the data. And the data is genuinely ambiguous.

The only honest answer to the question "What will the Fed do in September?" is: we do not know. The market knows this. That is why the probability is 58.6% and not 90%.

Silence is the only honest ledger. And the market's silence — its inability to assign a confident probability — is the most honest signal of all.

This analysis is based on publicly available data from the CME FedWatch tool and economic data releases as of August 25, 2024. Market conditions can change rapidly, and this analysis should not be construed as financial advice. Verify the data, trust no one, and position accordingly.