Fed Rate Cut Odds Drop to 92.8% as PPI Sparks Inflation Jitters

Market participants are recalibrating their expectations for Federal Reserve policy as inflation concerns begin to cloud the once-clear narrative of near-certain rate cuts. The latest Producer Price Index (PPI) data has introduced a layer of uncertainty, causing traders to reassess the probability of a rate reduction at the September 2025 meeting. According to CME Fedwatch data, the likelihood of the Fed lowering the federal funds rate to 4.00%–4.25% stands at 92.8%, a drop from over 96% prior to the PPI release. Meanwhile, 7.2% of traders now anticipate no rate change [1].

Kalshi traders are nearly unanimous in expecting the Fed funds rate to remain above 3% in September, with odds of 97% or higher for levels up to 3.75%. At 4%, confidence slips slightly to 96%, and below 4.25%, the probability drops sharply to 21%—suggesting that a rate cut is expected, but with increasing confidence as the target rate falls [1]. Polymarket data similarly shows strong support for a 25-basis-point cut at 72%, with the odds of a larger 50-basis-point cut remaining at just 5%. The chances of no change have risen to 23%, indicating a growing segment of the market is hedging against potential surprises [1].

The shift in market sentiment reflects a broader recalibration of expectations in response to the latest inflation signals. While the consensus remains on a modest September rate cut, the narrowing margin for error and the volatility of incoming economic data have led to a more cautious stance among traders. The probability of a rate cut has declined from previous levels, signaling that uncertainty is growing, albeit not overwhelming [1].

The PPI data has complicated the Federal Reserve’s policy framework, particularly as it continues to monitor a mixed inflationary landscape. While consumer-level inflation has shown signs of easing, cost pressures in the production sector remain elevated, challenging the Fed’s ability to communicate a unified and predictable policy path. This divergence has led to a more fragmented market outlook, with some analysts forecasting continued easing, while others warn of a more measured approach until clearer data emerges [1].

Financial markets have responded to the evolving scenario with a renewed appetite for risk. U.S. equities have gained ground, buoyed by the continued possibility of lower borrowing costs. However, this optimism is contingent on the inflation narrative holding firm and economic growth remaining stable. Should data signals begin to diverge or reverse, market sentiment could shift quickly, leading to a reassessment of both equity and bond positions [1].

As the Fed approaches its next policy meeting, attention will remain fixed on key data releases, including the Consumer Price Index and employment figures. These will play a crucial role in shaping the central bank’s next steps and may determine whether the current rate-cut probability remains intact or faces further revision. In the absence of a clear and consistent inflationary signal, the Fed is likely to maintain a data-dependent approach, prioritizing empirical evidence over market expectations [1].

Source:

[1] https://news.bitcoin.com/fed-rate-cut-faith-wavers-as-inflation-jitters-creep-in/

[2] https://www.advisorperspectives.com/firm/bloomberg-news