Fed rate hike September odds rise after divided Warsh-led hold

Markets increased the implied odds of a Fed rate hike September move after the central bank held interest rates steady at Chairman Kevin Warsh’s second meeting and three policymakers argued for an immediate increase. Fed funds futures showed a more than 57% probability of a quarter-point rise at the September meeting, according to CME’s FedWatch tool, while Kalshi traders put the chance of a hike at 53% against 43% for another hold.

The decision left investors reading the Federal Reserve as more hawkish than the unchanged rate decision alone suggested. Wall Street focused on Warsh’s emphasis on returning inflation to the Fed’s 2% target and on the size of the dissenting bloc, which Ian Lygen, head of U.S. rates strategy at BMO Capital Markets, said was the largest group pushing for an increase since September 2016.

Will the Fed raise rates in September?

Market pricing now points to September as an active policy meeting, though no outcome is assured. Ellen Zentner, chief economic strategist for Morgan Stanley Wealth Management, said market pricing for a hike appeared to have been moved forward and that September “remains a live meeting.”

Lygen wrote that the committee appeared to include “vocal hawks” while the majority aligned with Warsh. He noted that in 2016, after a comparable split, the Fed left rates unchanged at the following meeting before approving a 25 basis point increase in December of that year.

Stephen Douglass, chief economist at NISA Investment Advisors, said the dissents could be read as evidence of a “hawkish hold.” Douglass still said he expected the Fed’s next move to be a rate cut in March of next year.

Warsh said Wednesday that the central bank remained focused on bringing inflation back to its preferred annual pace of 2%, after years of hotter readings. “You’ve heard this before, but we will deliver price stability,” he said. Fed watchers cited upcoming inflation data as a key input, with an ongoing energy price shock threatening to lift reported inflation.

How did stocks and bonds react?

U.S. equities fell sharply after the Fed decision as investors weighed the prospect of tighter monetary policy. The S&P 500 dropped 1.5% on Wednesday, its worst second “Fed day” for a new chair in recent history, according to Bespoke Investment Group.

The Dow Jones Industrial Average lost more than 2%, its largest daily fall since markets were pressured by President Donald Trump’s tariff policy in April 2025. The Nasdaq Composite’s decline put the technology-heavy index more than 10% below its record high, and marked its sixth consecutive losing session, the first such run since 2024.

Josh Jamner, senior investment strategy analyst at ClearBridge Investments, said financial markets were still adjusting to the change in Fed leadership. He characterized higher price volatility under Warsh as part of the current market setting.

The bond market also moved. The 30-year Treasury yield rose more than 10 basis points on Wednesday to its highest level since July 2007. The 10-year Treasury yield climbed above 4.6%, while shorter-dated yields declined as investors interpreted the meeting as showing that the Fed was prepared to wait before responding further to inflation.

Jeffrey Gundlach, chief executive of DoubleLine Capital, told CNBC’s “Closing Bell” that the bond market was signaling that the Fed may need to raise rates to convince investors it can deliver 2% inflation. “If you really want to get to 2%, I think you have to raise interest rates,” Gundlach said.

This story draws on original reporting from CNBC.