What the Market Expects

The federal funds rate has sat at 3.50% to 3.75% since December, and the Fed has left it there at every meeting this year. Interest rate futures now price a quarter-point increase on Wednesday at 90.3%, with a 9.7% chance of no change and no meaningful chance of a cut. Those are the CME FedWatch numbers as of Monday morning, and they are derived from what traders are actually paying for fed funds futures.

The last time the Fed raised rates was July 2023. Six cuts have followed. An increase on Wednesday would turn a three-year direction of travel around.

How Fast This Changed

Reuters polls economists before every meeting. In the survey taken September 4 to 9, about 56% of them said the Fed would hold rates steady for the rest of the year. In the survey taken after Friday’s inflation report, 85% said the Fed would raise rates this week, and most of those expected at least one more increase by the end of March.

Three data releases did that. On September 4 the August jobs report showed 162,000 new jobs against an expected 53,000, with unemployment steady at 4.1%. On September 10 producer prices came in at 0.4% for the month. On September 11 consumer prices did the same, and the core reading came in a tenth above forecast.

The bond market moved with it. The two-year Treasury yield, the maturity most sensitive to Fed policy, has risen 36 basis points since the eve of Jackson Hole, to 4.56%.

The Argument Is About Energy

Brent crude trades around $107 a barrel, up roughly 60% from a year ago and about 20% since the end of August. Reporting attributes the move to disrupted Saudi output after drone attacks on a major pipeline, reduced tanker traffic near the Strait of Hormuz, and stronger Chinese buying. Gasoline prices rose 3.9% in August alone, and the energy component of the consumer price index is up 16.3% over twelve months.

That is most of the reason headline inflation reads 3.4%. Strip out food and energy and core inflation is 2.4%, and it has fallen in each of the last three months.

The Long End, and What the Treasury Has Been Doing

The 30-year Treasury yield closed at 5.37% on September 10, its highest level since July 2004. That is the rate the federal government pays to borrow for thirty years, and it is the reference point that mortgage rates and long-term corporate borrowing costs tend to follow.

The Fed does not set that rate. Lenders do. The Treasury Department has been trying to help at the margin: on August 19 it announced it would at least double the size of its long-dated buyback operations, from $2 billion to $4 billion, starting September 9. On September 9 it went further and lifted the following day’s operation to as much as $6 billion. Buybacks are a liquidity tool, not a policy rate, but they put one arm of the government visibly into the bond market.

One detail in the recent move is worth carrying into Wednesday. Since Jackson Hole the two-year yield has risen 36 basis points while the 30-year has risen 18. The front of the curve is moving twice as fast as the back, which is the market repricing what the Fed does over the next year or two.

There Is No Guidance to Read

Kevin Warsh became Fed Chair on May 22 and has run two meetings. Wednesday is his third, and he has spent those months removing the tools his predecessors used to tell markets what was coming.

At his first meeting he said plainly, “We’ve dropped forward guidance,” and the policy statement shrank to 132 words from 341. He declined to submit his own projection to the June dot plot, so the Chair’s dot is simply absent from it. He has set up five internal task forces, covering communications, the balance sheet, data sources, productivity and jobs, and the framework the Fed uses to analyze inflation, all reporting before the end of the year.

The closest thing to a signal came at Jackson Hole on August 28. Warsh said inflation was running above the 2% target, that the summer’s better readings “do not tell me that underlying trends have meaningfully improved,” and that without confidence inflation is heading to target “clearly and at sufficient speed,” then “we have work to do.” He also said he was committed to “a discipline, not to a decision.” Markets read the first part and repriced.