The Market Now Expects the Fed to Hike. Odds Just Jumped to 66 Percent

The Market Now Expects the Fed to Hike. Odds Just Jumped to 66 Percent

The market's view of the Federal Reserve has firmed dramatically. The CME FedWatch tool now puts the odds of a quarter-point rate hike at this month's meeting at 66.4 percent, with just 33.6 percent expecting no change, a sharp jump from the roughly even split of only a few days ago. What was a genuine coin flip has become the market's base case: the Fed is more likely than not to raise rates.

The shift traces back to Warsh and the data. Chair Warsh used Jackson Hole to stress that inflation remains too high and a hike is in play, and with price data still running in the mid-3s, traders have steadily moved toward pricing the tightening he hinted at. Words plus stubborn inflation moved the odds. The market is taking the Fed at its word.

Risk assets are feeling it immediately. Crypto, gold and silver all opened higher and then gave back their gains as the hike expectation weighed, because tighter policy strengthens the dollar, lifts yields and reduces the appeal of assets that pay no income. The rally was built on easier money. A 66 percent hike bet is the opposite of that.

Bond yields tell the same story. Long-term Treasury yields have pushed to multi-decade highs, and rising yields ripple into mortgages, corporate borrowing and the valuations of the growth stocks and crypto that led the summer rally. The bond market is not waiting for the meeting. It is pricing the outcome now.

The caution is that 66 percent is not certainty, and the data can still swing it. Friday's jobs report and more inflation figures land before the Fed meets, and a weak enough number could pull the odds back toward a hold, so the base case is a lean, not a lock. The bias is hawkish. The decision is still weeks and several reports away.

So in a matter of days the market has moved from wondering whether the Fed might cut to expecting it to hike, a complete reversal of the assumption that powered the rally. Hike odds at 66 percent, risk assets fading, yields high. A week ago a hike was a coin flip. Now it is the base case, and the last piece of the puzzle is Friday's jobs report.