Fed September Rate Hike Odds Rise as Warsh Set to Deliver Key Speech at Global Central Bank Symposium

The probability of a September rate hike is gradually increasing. Just one month ago, the probability was hovering around 50%. Three key factors are driving this shift.

First, economic data remains resilient. U.S. headline PCE inflation for June came in at 3.7%, while core PCE reached 3.3%, both well above the Federal Reserve’s 2% target. Data released on August 6 showed that initial jobless claims fell to just 199,000 last week, better than the market expectation of 205,000. Meanwhile, second-quarter nonfarm productivity rose 1.4%, exceeding the expected 0.6%. The labor market remains tight, while inflation is easing more slowly than anticipated.

Second, hawkish voices within the Federal Reserve are gaining momentum. At the July FOMC meeting, three voting members already supported an immediate rate hike. Since the meeting, several officials have reinforced their hawkish stance. St. Louis Fed President Musalem called for "strong restraint" on inflation. Minneapolis Fed President Kashkari said that "rates need to rise now" and that three consecutive rate hikes before year-end were "not impossible." Fed Governor Cook also stated that she is prepared to support a rate increase. Hawkish sentiment within the Fed is becoming both stronger and more direct.

Third, Warsh himself has left the door open for a September rate hike. According to media reports citing people familiar with the matter, if inflation data over the coming weeks remains elevated and markets further increase expectations for tighter policy, Warsh will be prepared to raise rates at the September meeting. He acknowledged communication missteps since taking office, saying he had failed to sufficiently emphasize the importance of price stability and had created confusion regarding the relationship between long-term reform plans and short-term monetary policy. However, he also made it clear that interest rates remain the primary policy tool and that "if necessary, they will be used at upcoming meetings."

Bank of America CEO Brian Moynihan offered an even more aggressive forecast on August 7, predicting that the Federal Reserve will raise rates three times during 2026, further boosting market expectations for tightening. Between now and the September FOMC meeting (scheduled for September 16–17), markets will face three key inflation tests.

August 12: July CPI Data. Markets expect July headline CPI to remain around 3.5% year-on-year, while core CPI is expected to stay near 2.6%. However, month-on-month CPI is expected to turn positive again. June CPI fell 0.4% month-on-month mainly because energy prices plunged 5.7% during the month, while the July Iran-related conflict has pushed oil prices higher again. If the month-on-month rebound in CPI exceeds expectations, the probability of a rate hike will increase further.

August 13: July PPI Data. The Producer Price Index serves as a leading indicator for CPI and will provide clues as to how inflation is being transmitted from producers to consumers.

August 26: July PCE Data. This is the Federal Reserve’s preferred inflation gauge. If core PCE remains above 3%, the case for a rate hike will become even stronger.

August 27–29: Jackson Hole Symposium. Warsh’s speech will determine the market’s final pricing for the September FOMC meeting.

Warsh’s First Jackson Hole Symposium Speech

The Jackson Hole Economic Symposium, hosted by the Federal Reserve Bank of Kansas City, is held annually in late August in Jackson Hole, Wyoming. It is one of the world's most important annual gatherings of central bankers and economists. This year's theme is "Financial Innovation: Implications for Payments and Policy."

For financial markets, Jackson Hole is significant because it serves as the Federal Reserve Chair's "golden window" for signaling future policy direction. Historically, several Fed Chairs have used the symposium to signal major policy shifts. Ben Bernanke hinted at QE2 there, Janet Yellen laid the groundwork for rate hikes, and Jerome Powell used the event to signal policy shifts.

Warsh’s situation is even more unique. Since taking office, he has adopted a communication strategy of "clear objectives, ambiguous path." The July FOMC statement was shortened from 344 words to 130 words, one dot was removed from the dot plot, and forward guidance was abandoned. Markets still do not understand his "reaction function"—in other words, what specific data or conditions would trigger a rate hike.

In a report released in early August, Morgan Stanley stated that Warsh is deliberately changing the way the Federal Reserve communicates with financial markets. Investors will closely watch the Jackson Hole Symposium in August for clues about the Fed’s reaction function and to assess whether there is upside risk of a surprise rate hike at the September meeting.