Federal Reserve rate-hike odds have moved sharply higher as oil stays above $90 a barrel and investors prepare for a run of U.S. jobs and inflation reports that could decide the September policy meeting.
Early Thursday, September 3, market pricing tracked by the CME FedWatch tool showed the probability of a quarter-point Fed rate increase at roughly 67%, according to a Reuters market snapshot.
That was up from about 37% a week earlier. Because futures prices move throughout the trading day, the number is not a prediction or a Fed decision, but the change shows how quickly expectations have shifted.
Oil is adding to that concern. Brent crude climbed as high as $97.39 a barrel and U.S. West Texas Intermediate reached $92.92 in Thursday trading as renewed U.S.-Iran tensions raised fears about supplies moving through the Middle East. Both benchmarks remained above $90 during early trade.
The move builds on the combination of higher oil prices, elevated inflation and a more hawkish Federal Reserve outlook that Investozora examined in its U.S. economy update earlier this week. Still, a September rate increase is far from locked in.
The Federal Open Market Committee left its benchmark rate unchanged in July, but the vote itself showed that the debate had already shifted. The Federal Reserve’s July FOMC statement kept the federal funds target at 3.50% to 3.75% by a 9-3 vote.
Beth Hammack, Neel Kashkari and Lorie Logan dissented because they preferred an immediate quarter-point increase. The rate picture heading into September now looks like this:
- Current federal funds target: 3.50% to 3.75%.
- A 25-basis-point hike would raise the target to 3.75% to 4.00%.
- Early Thursday market pricing: roughly 67% probability of a September quarter-point hike, up from about 37% one week earlier.
- August jobs report: Friday, September 4 at 8:30 a.m. ET.
- August PPI inflation report: Thursday, September 10 at 8:30 a.m. ET.
- August CPI inflation report: Friday, September 11 at 8:30 a.m. ET.
- September FOMC decision: Wednesday, September 16 at 2 p.m. ET.
The official dates come from the BLS September calendar and the Federal Reserve meeting calendar. Friday’s jobs report is the first major test.
The latest official labor data do not show a collapsing job market, but they clearly show slower hiring. U.S. nonfarm payrolls fell by 23,000 in July while unemployment remained at 4.1%, according to the BLS July employment report. BLS also revised May and June payroll growth down by a combined 103,000 jobs.
Other data tell a similar story. ADP estimated that private employers added only 38,000 jobs in August, below the 48,000 economists expected in a Reuters poll. Meanwhile, the latest official JOLTS report showed 7.3 million job openings in July, 5.1 million hires, 3.1 million quits and 1.7 million layoffs and discharges.
That is why Investozora’s earlier analysis of the July JOLTS data and the broader U.S. labor-market slowdown matters for the Fed debate. The labor market is showing weaker hiring without a comparable surge in layoffs.
A clearly weak August payroll report, especially if unemployment rises or earlier months are revised lower again, would give Fed officials a stronger reason to avoid tightening policy while employment is losing momentum. A stronger report, by contrast, would make it easier for policymakers to keep their attention on inflation.
Inflation is where the September decision becomes more difficult. The July CPI report showed consumer prices rising 3.4% from a year earlier, down slightly from 3.5% in June. Core CPI, which removes food and energy, rose 2.5% over the year. But energy prices were already 14.7% higher than a year earlier, while gasoline prices were up 24.6%.
July also received temporary monthly relief from energy: the energy index fell 1.5% during the month and gasoline fell 2.9%. That detail is important when reading Investozora’s July inflation breakdown because the inflation problem is not simply whether crude oil crosses a particular dollar level.
Oil above $90 today also cannot change the August CPI report due September 11. August has already ended. The latest crude surge instead matters mainly as a forward-looking inflation risk. If expensive oil persists and passes through to gasoline, transportation, freight or other costs, it could keep inflation pressure alive into coming months.
The Fed’s preferred inflation gauge is also sending a firmer signal than core CPI. The BEA July PCE report showed headline PCE inflation at 3.7% from a year earlier and core PCE at 3.3%, both well above the Fed’s 2% goal.
Fed Chair Kevin Warsh reinforced that concern in his Jackson Hole remarks on August 28. He said the 2% PCE inflation objective remained firm and described inflation as still running above target, while saying the labor market remained consistent with full employment. There is another September timing issue that could prove especially important.
The Fed will not have an official August PCE inflation reading when it makes its September decision. The BEA release schedule shows August personal income and PCE data arriving on September 30—two weeks after the September 16 Fed announcement.
That means Friday’s jobs report, September 10 PPI and September 11 CPI will be the major fresh public labor and inflation releases available before the meeting. Investors looking for the next move can follow those releases alongside Investozora’s September Fed decision coverage rather than treating today’s futures probability as a settled outcome.
For consumers, the difference matters. Another Fed hike could keep pressure on variable borrowing rates and make the high-rate environment last longer. Credit cards and some other floating-rate products tend to respond more directly to changes in short-term rates, while mortgage rates depend heavily on longer-term Treasury yields and do not move one-for-one with the Fed. Investozora’s guide to higher borrowing costs explains that distinction.
The central question for September is therefore not simply whether oil remains above $90. It is whether the incoming data give the Fed enough confidence that the labor market can withstand another increase while inflation remains too high.
Right now, markets have moved from treating a September hike as a minority possibility to pricing it as the more likely outcome. But Friday’s jobs report can change that picture quickly, and the August CPI report on September 11 may be even more decisive.
Weak hiring combined with softer underlying inflation would strengthen the case for another hold. Stable employment combined with persistent inflation would strengthen the case for a quarter-point hike. Oil has raised the stakes. The next eight days of U.S. economic data will determine whether those higher rate-hike odds survive until the Fed meets.
