Hot core CPI lifts September hike odds to 80%

September Federal Reserve rate-hike odds climbed to around 80% Friday after core inflation came in hotter than expected, giving Chair Kevin Warsh less room to wait even as the economy absorbs an oil-driven supply shock. Polymarket traders now price 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 put 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 still 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 is due to announce its next interest-rate decision on Sept. 16.

The one-week repricing on Polymarket has been sharp. September hike odds were about 50% a week ago, then rose to 61% after strong August payrolls. They later moved to around 70% after tensions with Iran pushed oil above $100 and Thursday’s hotter producer-price report, before Friday added another hawkish data point. Headline CPI rose August core CPI rose 0.4% and 3.4% annually, both broadly in line with expectations.

Core CPI increased 0.3% from July versus the 0.2% economists expected, marking its biggest monthly gain since April. Fed Governor Christopher Waller said last week he would back holding rates if August inflation showed continued progress toward 2%, but said he would consider a hike if inflation came in hot. He said, "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, was consistent with the hawkish threshold he described. The article then asked whether the Fed would hike into a supply shock.

Fed officials have traditionally said temporary oil shocks should be looked through because 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 argument 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 Friday’s hotter-than-expected core reading makes that argument harder to sustain.

The Fed’s preferred PCE measure was already running at 3.7% in July, and three FOMC members voted for a hike that month. Brent is still above $100 after moving past that level this week. The issue for Warsh is whether the Fed can continue to look through the oil shock when core inflation is coming in hotter than expected.