Key Takeaways:
Cooler July inflation and a shrinking payroll count have cut the odds of a September Federal Reserve rate hike to about one in three, easing the pressure that had built on new Chair Kevin Warsh since he took office in May.
The Federal Reserve's path to a September rate increase has narrowed sharply after two Bureau of Labor Statistics reports, with market-implied odds of a move falling to about 33 percent from 82 percent a few weeks ago, according to CME Group's FedWatch tool. The July jobs report showed the U.S. economy lost roughly 23,000 jobs against an expected gain of 83,000, while May and June growth was revised down by a combined 103,000. Five days later, the consumer price index rose 0.1 percent from June and 3.4 percent year over year, easing from 3.5 percent in June, with core CPI up 0.2 percent monthly and 2.5 percent annually.
"The data give the Fed the luxury of waiting," said Aichi Amemiya, chief economist at Nomura, which maintains a baseline forecast of no policy change. Nomura economists, including Ruchir Sharma and Jeremy Schwartz, argue the cooling inflation and stabilizing labor market let the central bank hold without damaging its credibility, even after July FOMC minutes showed three voters backing an immediate hike and several others leaning that way.
The repricing rippled across assets. The S&P 500 closed at a record 7,798.99, up 0.65 percent, while the Nasdaq Composite climbed 0.81 percent to 26,803.02 and the Dow Jones Industrial Average added 0.13 percent to 53,839.99. The tech-heavy Nasdaq-100 has outperformed the S&P 500 and Dow so far in August, lifting rate-sensitive AI infrastructure names such as CoreWeave and Nebius Group, while the 10-year Treasury yield held near 4.65 percent. July producer prices were flat, missing forecasts for a 0.2 percent gain, and annual wholesale inflation slowed to 4.7 percent from 5.5 percent.
Nomura points to a 40-year pattern: since 1990, the Fed has never turned hawkish in the second half of an election year, whether presidential or midterm. The 2022 November hike came six days before the midterms but inside an already-running tightening cycle, whereas a move now would restart hikes after two years of cuts — a shift with no modern precedent. The last comparable midterm moment was September 1994, when the committee held despite internal pressure, then hiked 75 basis points a week after the election.
The stakes extend beyond September. CME FedWatch still prices a 67.6 percent probability of a hike by December, rising to 73.6 percent by January and 79.5 percent by March, while Kalshi puts the chance of a move before July 2027 at 68 percent. An escalation in the Iran war remains the wild card: with traffic through the Strait of Hormuz severely impeded and Treasury Secretary Scott Bessent vowing "measures like have never been seen" against Tehran, a renewed oil spike could push inflation and rate expectations higher again. If inflation keeps cooling, Nomura argues the current pause could stretch into an indefinite hold, fully unwinding the market's pricing of a hike.
This article is for informational purposes only and does not constitute investment advice.
