Markets Unite in Predicting Fed's September Rate Cut Move

Markets are increasingly aligning behind expectations of a Federal Reserve rate cut at its upcoming September meeting, with both prediction markets and financial instruments such as the CME FedWatch tool showing strong consensus. The Federal Reserve’s decision comes amid slowing job growth and stable unemployment rates, signaling a shift in policy stance after nine months of holding interest rates steady. Fed Chair Jerome Powell’s speech at the Jackson Hole symposium on August 22 hinted at the possibility of a cut, emphasizing the need to adjust policy in light of rising downside risks to employment. This prompted a surge in market expectations, with the CME FedWatch tool now showing an 87% probability of a 25-basis-point rate cut at the September 16-17 meeting, up from 75% the week prior [1].

The anticipated cut has already influenced mortgage rates, which have fallen to their lowest level in six months. As of mid-September, the average 30-year fixed-rate mortgage had declined to 6.59%, down from 6.87% in late July. The drop predates the Fed’s expected action and suggests that long-term borrowing costs are responding to market sentiment rather than waiting for the central bank’s official move. This trend is also evident in the bond market, where the 10-year Treasury yield fell to a four-month low of 4.17% following a weaker-than-expected August jobs report and rising initial jobless claims [2]. The combination of these factors has reinforced the belief that the Fed is poised to ease policy in the coming weeks.

On-chain prediction markets, such as Polymarket, have also reflected a high degree of confidence in the Fed’s decision. These markets, which allow users to trade shares based on the outcomes of real-world events, have priced the probability of a September rate cut above 95%. The platform’s transparent and decentralized structure enables traders to adjust their positions in real time as new information emerges, making it a dynamic tool for gauging market sentiment. Polymarket has historically outperformed traditional polling and media forecasts in predicting major events, such as the 2024 U.S. presidential election. In this case, the market has consistently signaled that a quarter-point cut is the most likely outcome [3].

Financial futures markets are in close agreement with these expectations. Federal funds futures indicate a 95% chance of a 25-basis-point cut at the September meeting, with a 53% probability of a similar cut at the October meeting. This suggests that traders are not only betting on a near-term cut but also anticipating additional easing later in the year. However, the Fed has historically been cautious in its decision-making process, relying heavily on incoming data. Key economic indicators such as the Personal Consumption Expenditures index, the August nonfarm payrolls report, and the Consumer Price Index will all be released ahead of the September meeting, potentially influencing the central bank’s final decision [1].

Despite the strong consensus on a rate cut, there remains uncertainty about the broader implications for the economy. While a reduction in short-term interest rates is likely to stimulate borrowing and investment, the impact on long-term borrowing costs—such as those for mortgages—depends on a range of factors beyond the Fed’s control. Housing market dynamics, inflation expectations, and global economic conditions also play a role in determining mortgage rates. As a result, while the Fed’s policy shift is expected to create favorable conditions for borrowing, the extent to which it translates into lower mortgage rates will depend on the overall trajectory of the economy [2].

Source:

[1] Mortgage Rates Fall on Fed Cut Speculation (https://www.floridarealtors.org/news-media/news-articles/2025/09/mortgage-rates-fall-fed-cut-speculation)

[2] Stocks Supported by Fed Rate Cut Expectations (https://www.nasdaq.com/articles/stocks-supported-fed-rate-cut-expectations)

[3] The Golden Age of Prediction Markets: Polymarket Rages ... (https://onekey.so/blog/ecosystem/the-golden-age-of-prediction-markets-polymarket-rages-kalshi-arrives/)