Wall Street had a bumpy end to the week. The S&P 500 edged lower on Friday after the August jobs report came in stronger than expected, and Treasury yields jumped as traders recalculated their bets on where interest rates are headed.
For much of the summer, markets had leaned toward expecting the Federal Reserve to hold rates steady or even cut them later this year. That calculus has shifted. Coverage this week described the Fed's coming decision, due at its meeting on September 16, as essentially a coin flip between holding rates steady and raising them, with rate-hike odds increasing following recent comments attributed to Fed leadership under Chair Kevin Warsh. Some analysts now expect a quarter-point, or 25 basis point, increase, a notable reversal from the rate-cut expectations that dominated market chatter earlier in the year.
Two forces are driving this shift. The first is the jobs data itself: a labor market that looks more resilient than expected reduces the case for the Fed to ease policy. The second is energy prices, which have been volatile because of the renewed conflict involving Iran, the Strait of Hormuz, and Gulf military bases. Rising energy costs tend to filter into broader inflation measures, and a central bank focused on keeping inflation under control is generally reluctant to cut rates, or may even lean toward raising them, when energy shocks are pushing prices higher.
Not every analyst is convinced a hike is coming. Some caution that a single strong jobs report and a bout of energy volatility are not necessarily enough to justify a rate increase, and that the Fed could still choose to hold steady while it waits for more data. The debate is expected to play out in the run-up to the September 16 meeting.
Markets will be watching for further comments from Fed officials and any additional economic data released before the September 16 policy meeting.
When is the Fed's next rate decision?
The Federal Reserve's next policy meeting concludes September 16.
Why are rate-hike odds rising?
A stronger-than-expected jobs report and rising energy prices tied to Gulf tensions have both pushed traders to consider a possible rate increase rather than a cut.