Is the September Rate Hike Off the Table, or One Inflation Report Away?

The Federal Reserve’s target range has sat at 3.5 to 3.75 percent since late last year, and for five straight meetings the committee has chosen to wait. The debate going into the September 15-16 meeting has a narrower shape than usual: the question on trading desks is whether the next move is an increase. On Thursday that question tilted. Governor Christopher Waller said he would be inclined to support holding rates steady if inflation data due over the next two weeks keeps moving toward the 2 percent goal. Fed funds futures pared the odds of a September increase, which had climbed toward two-thirds after Chair Kevin Warsh’s hawkish Jackson Hole remarks a week earlier. That same week, a services survey landed showing prices at their hottest in three years. The two readings pull in opposite directions, and so does the committee.

A governor leans to a hold, and hiring keeps cooling

Waller is a permanent voter on the committee, so his lean matters more than a regional president’s. His condition was disinflation: keep the recent progress going, and he could back a pause. The labor side of the ledger already supports patience. The Institute for Supply Management’s services employment index read 47.8 in August, in contraction for a second straight month even as demand strengthened. Private payrolls told a similar story, with ADP counting 38,000 new jobs in August, the weakest gain since January and below the roughly 47,000 economists expected. Hiring has run soft for months.

Markets read the shift quickly. Futures eased the implied probability of a September hike back toward a coin flip after Waller spoke, down from the roughly two-thirds priced in following Warsh. The 10-year Treasury yield slipped, equities held near their highs, and gold, which had fallen to a three-week low, steadied and turned higher as yields eased. The reasoning behind the move is straightforward: a Fed that has waited five times, watching the labor market lose momentum, has little cause to tighten into cooling hiring.

Services prices hit a three-year high as demand accelerates

The same ISM report is the hawks’ evidence. Its prices-paid index rose to 72.6 from 70.3, the highest reading since August 2022 and the fifth above 70 in six months. Cost pressure that stubborn is exactly what a rate increase is meant to lean against. The activity numbers, meanwhile, describe an economy with room to take one. The headline services index climbed to 55.4 from 54.1, its 26th month in expansion. The business-activity gauge jumped to 61.7 and new orders rose to 60.9, both well clear of July. That looks like acceleration, not a stall.

The chair has been pointing this way. At Jackson Hole on August 28, Warsh signaled that higher rates may be needed if underlying inflation fails to improve clearly, and the market lifted its September hike odds toward two-thirds in response. The minutes of the July meeting recorded three regional presidents dissenting in favor of an immediate increase. And Waller left himself an exit: he said his vote would be heavily influenced by the August inflation print, and that a reversal in the recent progress could still justify a hike this month.

What the data shows

The market has leaned toward the patient reading. At Wednesday’s close the S&P 500 stood at 7,735.57, up 0.9 percent on the session. The Dow added 0.94 percent to 53,561.56 and the Nasdaq gained 1.21 percent to 26,534.87. The VIX sat at 14.9, a level that signals a calm tape, and the 10-year Treasury yield was 4.79 percent. Behind the debate are the August releases themselves: services prices at 72.6, services employment at 47.8, the headline services index at 55.4, and ADP payrolls at 38,000. The disinflation-is-winning case and the inflation-is-sticky case can each point to a real number in that set.

What would settle it

Two dates carry the weight. The Labor Department releases the August Consumer Price Index on Friday, September 11, at 8:30 a.m. Eastern. It is the last inflation reading before the meeting and the one Waller named as his pivot. By his own account, a print that extends the recent cooling would lock in his support for a hold, while a hotter figure would pull the odds back toward a hike and toward Warsh’s framing. The FOMC then announces its decision on Wednesday, September 16, at 2 p.m. Eastern. In the days between, the weekly jobless-claims reports and any further remarks from officials will fill in the labor picture the committee is weighing.

The same stretch has produced evidence for both cases. An influential governor has said he could hold, and the hiring data gives him cover. The services survey shows prices still climbing and demand still building, which is the hawks’ ground. The committee that gathers in two weeks is divided, and its most closely watched member has tied his vote to a report that has not yet been published. The range of plausible outcomes narrows on September 11 and closes on September 16.

This is a general-market summary for information only — not investment advice, and not a recommendation regarding any security.