A September Rate Hike Went From Unlikely to a Coin Flip in One Morning

The bond market repriced the September Federal Open Market Committee meeting on Friday morning, after Chairman Kevin Warsh's Jackson Hole keynote. The size of the move is easier to see in the front end of the Treasury curve and in futures pricing than in the stock indices, which finished the day roughly where they started.

What moved

• Two-year Treasury yield: up as much as nine basis points, to 4.32%, per Benzinga. Yahoo Finance recorded the day's move at roughly eight basis points.
• Ten-year Treasury yield: up roughly two basis points.
• Thirty-year Treasury yield: down roughly 1.5 basis points.
• Dollar: up 0.4%.
• S&P 500: -0.12% to 7,722.06. Dow: +0.05% to 53,598.14. Nasdaq Composite: -0.34% to 26,450.59.

The odds, and why two outlets print two numbers

Benzinga reported CME Group FedWatch pricing for a quarter-point September increase rising from 35% on Thursday to 59% on Friday, with Polymarket reaching as high as 69% from the mid-50s. HousingWire reported the same CME series moving from 35.4% to 57.4%. Both can be right. FedWatch is computed continuously from fed funds futures prices, so the number depends on the moment it is read, and different outlets snapshot it at different times of day.

How that probability is built

A fed funds futures contract settles on the average effective federal funds rate over its delivery month. The current target range is 3.50% to 3.75%, set on July 29 and effective July 30, with interest on reserve balances at 3.65%. If traders think the rate will be higher for part of September, the contract price falls, and the implied average rate rises. The gap between that implied average and the current rate, divided by the size of the move being priced, gives the headline probability.

This is a price, not a forecast. It reflects where money changed hands, including hedging demand that has nothing to do with anyone's view of the Fed.

The shape of the move matters more than the size

Short yields rose and the long bond fell. That is a flattening, and it is what you would expect if the market took the speech as saying the Fed will be tighter sooner. Higher policy rates in the near term are priced at the front end. The long end prices the average expected short rate over decades plus a term premium, and a central bank seen as more willing to act against inflation gives investors less reason to demand compensation for inflation risk over thirty years.

The two-year note sits at the part of the curve where policy expectations dominate, which is why it is the maturity to watch on a day like this.

Why it matters

Front-end Treasury yields feed into the pricing of short-dated savings products, money market fund yields and floating-rate loans, and they do so faster than the long end feeds into mortgage rates. A repricing concentrated in the two-year note is therefore felt in cash and credit before it is felt in housing.