Traders bet Fed will hold rates steady in September after inflation data

Traders maintained a cautious stance on Federal Reserve policy expectations on Tuesday, with money markets pricing a near-certain probability of a rate hold at the September meeting following recent U.S. inflation data.

The consumer price index rose 3.2% year-over-year in July, matching the median estimate in a Reuters poll and reinforcing the view that the Fed’s tightening cycle may have peaked. Core CPI, excluding food and energy, increased 4.7%, also in line with forecasts, reducing immediate pressure on policymakers to resume rate hikes.

Futures tied to the Fed’s benchmark rate indicate a 97% chance of rates remaining unchanged at the September 19-20 policy meeting, according to the CME FedWatch Tool. Traders have pared back bets on a November hike, with the probability of another increase by year-end falling to around 40%, down from roughly 50% a week ago.

The data-driven approach comes as Fed officials continue to emphasize a data-dependent stance, with Chair Jerome Powell signaling that decisions will hinge on incoming economic indicators. The central bank’s preferred inflation gauge, the personal consumption expenditures price index, is due later this week, which could further shape expectations.

Market reaction remained muted, with U.S. Treasury yields little changed and the S&P 500 holding near record highs. Analysts noted that the lack of surprise in the inflation figures left little room for significant shifts in positioning, though volatility could rise ahead of the Fed’s next policy decision.

The Fed’s next meeting is scheduled for September 19-20, with a press conference by Powell following the announcement. Traders will closely monitor subsequent economic releases, including retail sales and labor market data, for clues on the path forward.