September Fed hike odds fall as CPI and PPI cool

Financial markets have spent much of August preparing for a potential interest-rate increase by the Federal Reserve, under the leadership of Kevin Warsh.

But as of this week, that prospect increasingly looks like a trade from another world.

The odds of a September rate hike have fallen to about 25% on Polymarket, from around 60% earlier this month.

But the bigger story is not simply that investors expect an easier Fed.

The market is separating the short-term monetary-policy outlook from the structural forces keeping long-term bond yields high.

The Warsh Rate-Hike Trade Is Unraveling The latest Consumer Price Index (CPI) and Producer Price Index (PPI) inflation data weakened the case for an immediate rate hike.

July headline CPI rose just 0.1%, while core CPI increased 0.2%, both landing in line with estimates.

PPI was unchanged for the month, with core PPI rising only 0.1%, both below expectations.

Combined with last Friday’s weak July payrolls numbers, that has driven a sharp dial-back in tightening expectations.

Pantheon Macroeconomics said the data make a September hike increasingly difficult to justify. “Given recent data, Mr.

Warsh is very unlikely to sound stridently hawkish,” chief U.S. economist Samuel Tombs said in a note.

Pantheon expects the Fed to keep the policy rate unchanged for the remainder of the year, as core inflation remains flat.

But Long-Term Yields Have a Different Problem This is where the market story gets more complicated.

The collapse in September hike expectations should normally be bullish for Treasury bonds.

Yet the iShares 20+ Year Treasury Bond ETF (NASDAQ: TLT ) remains near its lowest levels in years.

Chart: Despite Reducing Fed Hike Risk, Long-Term Bond ETF Trades Near +20-Year Lows The reason is that long-term yields are not controlled exclusively by the Fed.

Yardeni says higher yields also reflect strong AI-related demand for capital, demographic pressures on national saving, economic resilience and increased borrowing by hyperscalers to fund AI investments. "We view a 10-year Treasury yield between 4.00% and 5.00% as broadly consistent with these fundamentals," Yardeni said.

In other words, a September Fed hold could help Treasury bonds without necessarily triggering a massive bond rally. "The Bond Vigilantes are not revolting yet," Yardeni said.

Why Stocks Are Getting the Better Deal Equities face a much simpler setup.

If the Fed does not hike in September, investors can remove one of the biggest near-term threats to risk assets.

At the same time, the economy remains resilient.

Yardeni notes that the Weekly Economic Index was consistent with roughly 3% real GDP growth, while the Atlanta Fed’s GDPNow model was pointing to strong third-quarter growth.

That combination — less Fed tightening with a strong economy — is exactly what stocks want.

The SPDR S&P 500 ETF Trust (NYSE: SPY ) closed at a record high on Thursday, while the iShares Russell 2000 ETF (NYSE: IWM ) also reached a new peak.

The SPDR Dow Jones Industrial Average ETF Trust (NYSE: DIA ) and Invesco QQQ Trust (NASDAQ: QQQ ) are also trading just shy of their all-time highs.

For investors, the message is becoming clearer: the September hike trade is collapsing, but the high-rate world is not.

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