Market Bets Nailed: Fed Rate Cut All But Certain by September 17

Market expectations for a Federal Reserve rate cut in September have surged to 97.4% following the release of the August ADP Employment Report and the latest initial jobless claims data for the week. The ADP report, which showed a weaker-than-anticipated increase in private-sector employment, has intensified speculation that the Fed will act to support the labor market and stimulate economic growth. Meanwhile, the initial jobless claims data, which remained elevated, reinforced concerns over rising unemployment and further pressured policymakers toward a reduction in interest rates [1]. These developments highlight a shift in economic dynamics that could lead to significant market reactions as traders prepare for potential monetary easing.

The Federal Reserve has maintained a federal funds rate range of 4.25% to 4.50% throughout 2025 after implementing three rate cuts in late 2024, reducing the rate by a full percentage point from its starting point. However, the central bank’s pause in 2025 has coincided with inflation remaining largely unchanged and mounting concerns over employment. With these indicators influencing the broader economic outlook, the market has priced in a high probability of a rate cut at the Fed’s next policy meeting, which is scheduled to conclude on September 17. The CME Group’s FedWatch tool reflects this anticipation, showing a current probability of 90% for a rate cut as of mid-month, with this likelihood increasing steadily in the days following the ADP and jobless claims data [1].

Despite the anticipation of a rate cut, analysts emphasize that its impact on mortgage rates will likely be limited in the short term. Historical precedents suggest that mortgage rates often respond before the Fed officially acts, as lenders may adjust their offerings in anticipation of policy changes. For example, last September saw mortgage rates fall significantly before the Fed announced a larger-than-expected 50-basis-point cut. In contrast, the current market environment is expected to see a more modest cut of 25 basis points, which is unlikely to result in a substantial and immediate drop in mortgage rates. Instead, the reduction may contribute to a gradual and incremental decline in borrowing costs over the next few weeks [1].

Moreover, mortgage rates are influenced by a range of factors beyond the Fed’s actions. The 10-year Treasury yield, for instance, has played a significant role in shaping mortgage rate trends, particularly as it affects long-term borrowing costs across the economy. According to FreddieMac data, the average 30-year mortgage rate has already declined from 7.04% in January 2025 to 6.56% by the end of August, suggesting a trend of moderation that predates the recent economic indicators. While a Fed rate cut could reinforce this downward trajectory, the full impact will depend on how broader market conditions, including Treasury yields, evolve in the coming months [1].

The high probability of a rate cut also underscores the Fed’s balancing act between supporting economic growth and managing inflationary pressures. With the labor market showing signs of softening and consumer confidence remaining under pressure, the central bank faces the challenge of determining the appropriate pace and magnitude of its next move. While the upcoming cut is expected to be a one-time adjustment of 25 basis points, market participants are closely watching whether subsequent meetings will lead to further reductions. The decision will hinge on how the latest economic data, particularly in employment and inflation, unfold in the final weeks of the policy review [1].

Source: [1] How low will mortgage rates fall with a September 2025 Fed rate cut? (https://www.cbsnews.com/news/how-low-will-mortgage-rates-fall-september-2025-fed-rate-cut/)