September Federal Reserve rate-hike odds surged to around 80% Friday after core inflation came in hotter than expected, leaving Chair Kevin Warsh with less room to wait even as the economy absorbs an oil-driven supply shock.
Polymarket traders now put the chance of a 25-basis-point September hike at around 80%. The market has drawn more than $113 million in volume.
Interest-rate futures moved even more aggressively. CME FedWatch showed the probability of a September hike at 91.6% Friday morning, up from 72.4% a day earlier and 59.4% a week ago.
Rate-sensitive technology stocks nevertheless held up Friday morning, with the Invesco QQQ Trust (NASDAQ:QQQ) up about 1% in premarket trading despite the hotter core reading and higher Treasury yields.
The Fed will announce its next interest-rate decision on Sept. 16.
From Coin Flip to Heavy Favorite
The move caps a dramatic one-week repricing on Polymarket.
September hike odds were about 50% a week ago. Strong August payrolls pushed them to 61%, before escalating tensions with Iran sent oil above $100 and Thursday’s hot producer-price report lifted the odds to roughly 70%.
Friday supplied another hawkish data point.
Headline CPI rose 0.4% in August and 3.4% annually, both broadly in line with expectations. Core CPI, however, rose 0.3% from July versus the 0.2% economists expected, its biggest monthly increase since April.
Fed Governor Christopher Waller said last week he would support holding rates if August inflation showed continued progress toward 2%, but would consider a hike if inflation came in hot. "It may not take much acceleration in inflation to nudge me into supporting tighter policy."
Friday’s 0.3% monthly core CPI reading, above the 0.2% consensus, landed squarely on the hawkish side of that test.
Would the Fed Hike Into a Supply Shock?
Fed officials have traditionally argued for looking through temporary oil shocks, since monetary policy works with a lag and tighter rates can deepen the hit to growth and employment.
Then-Fed Chair Jerome Powell said an aggressive response to a short-lived supply shock could "exacerbate macroeconomic volatility" without improving price stability.
Treasury Secretary Scott Bessent made a similar case on Aug. 31, saying policymakers traditionally do not raise rates after a supply shock unless they see "second or third order effects." He also called core inflation "very, very restrained."
Friday’s hotter-than-expected core reading complicates that argument. The Fed’s preferred PCE measure was already running at 3.7% in July, while three FOMC members voted for a hike that month.
Brent, meanwhile, remains above $100 after surging past that level this week.
The question for Warsh is whether the Fed can still look through the oil shock when core inflation is coming in hotter than expected.
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