Why Markets Suddenly Think the Fed Will Raise Rates Again
Traders who bet on the Federal Reserve's next move now see a 68% chance of an interest rate hike in September 2026, up from 35% just two weeks earlier. The shift began after Fed Chairman Kevin Warsh said in late August that inflation was a concern. The dollar, tracked through something called the WSJ Dollar Index (which measures the dollar's value against other major currencies), stood at 95.72 on September 7 — down slightly over the past month but starting to rise as expectations shifted. Reuters
The Federal Reserve sets a benchmark interest rate — the rate banks charge each other for overnight loans — and that rate influences everything from mortgage rates to credit card APRs. When the Fed raises it, borrowing gets more expensive, which tends to slow the economy and cool inflation.
Two weeks ago, the picture was very different. On August 13, traders saw just a 35% chance of a September hike, down from 40% the week before. That was the day Fed Governor Christopher Waller said he'd support keeping rates unchanged if August inflation data justified it. His words briefly steadied the dollar and lifted stock prices. Reuters
Warsh's late-August remarks changed that. The dollar strengthened 0.48% against the Japanese yen to 160.15 on August 28, heading for its third weekly gain in four weeks. Treasury yields — the interest rate the U.S. government pays when it borrows money — and the dollar kept rising alongside oil prices into early September, with markets seeing nearly equal chances of a hike or no hike at the Fed's September 16 meeting. Reuters
By September 4, the dollar had strengthened 0.26% against the yen to 156.19, a notable shift from the 160.15 level six days earlier. The yen's rise had a separate cause: traders ramped up bets that the Bank of Japan would raise its own interest rates. On September 3, the yen jumped more than 2% against the dollar in a single day. Reuters
The yen's surge during the week of September 4 reflects a market caught between two central banks pulling in different directions. The Fed looks more likely to raise rates, which pressures Asian currencies broadly. At the same time, the Bank of Japan's own rate hikes are boosting the yen independently. For other Asian currencies, the picture is simpler: they were holding steady against the dollar in early September but could weaken if the Fed actually hikes. WSJ
The interest rate on 10-year U.S. government bonds fell slightly to 4.710% on September 7, which seems odd given the high odds of a rate hike. One possible explanation: bond investors may be betting that a rate hike would slow the economy enough that the Fed would have to cut rates sooner rather than later. That would pull long-term borrowing costs down even as short-term rates go up.
The broader picture is that going from 35% to 68% odds in two weeks is a fast, dramatic shift. Markets that assumed the Fed was done raising rates have had to adjust quickly. The dollar index at 95.72 captures that tension: it's down for the month, but the pressure from rate expectations is pushing it up. Currency traders in Asia are caught in the middle, between a strengthening dollar and the Bank of Japan's own rate-hike plans. The September 16 Fed meeting will be the moment of decision, but the August inflation report that Governor Waller said he's watching is the real trigger. Until that data arrives, the 68% figure is a moving target, not a done deal.
