US Fed rate decision: What markets are watching ahead of September meeting

The US Federal Reserve's September rate decision is firmly in focus as markets reassess the path of interest rates following stronger-than-expected payrolls data, while elevated crude oil prices and escalating tensions in the Middle East have added to inflation concerns.

Investors are now turning their attention to the upcoming August inflation report, which could provide further clues on the Fed's policy outlook.

Data released on Friday showed that US nonfarm payrolls rose by 162,000 in August, following a revised increase of 23,000 in July and comfortably exceeding forecasts for a gain of 56,000. The unemployment rate held steady at 4.1%, in line with expectations.

David Kohl, Chief Economist at Julius Baer, said that US job growth in August came as a massive surprise, with the economy adding 162,000 jobs on a seasonally adjusted basis. The unusually low seasonal adjustment this year, compared with August 2025, almost entirely explains the large positive surprise.

According to initial estimates, seasonality boosted job growth in August 2025 by 178,000, whereas the Bureau of Labour Statistics (BLS) assumed it added only 8,000 jobs this year. The result is fairly high job growth on a seasonally adjusted basis.

Kohl said that, apart from these statistical technicalities, the underlying trend in the August jobs report was quite robust. The July payroll drop was revised to a moderate increase of +21,000, bringing the net two-month revision to +55,000.

The share of industries adding jobs increased to 55.6%, with cyclical industries such as construction and manufacturing adding jobs, while the unemployment rate remained at 4.1%. An alternative measure of labour market slack also points to a low unemployment rate.

Markets raise Fed rate-hike bets after strong US jobs report

Following the stronger-than-expected report, markets edged towards the possibility of a rate hike by the Fed. Traders were pricing in about a 60% chance of a quarter-percentage-point increase at the central bank's September 15-16 policy meeting, according to the CME Group's FedWatch tool.

According to Kohl, the solid labour market report has generated considerable excitement ahead of the forthcoming FOMC meeting on September 16. With only 9 days to go, the probabilities implied by Fed Funds futures pricing had shifted to 40% for no change and 60% for a 25-basis-point hike.

Prior to the labour market report and following dovish remarks by Fed Governor Waller on September 3, the implied probabilities were 50-50.

Kohl said the Fed is much more concerned about inflation than the labour market and that the August inflation will be closely watched.

“We expect the inflation trend excluding energy to decline, enabling the Fed to hold rates unchanged once more.” However, Kohl said any positive surprise in this week’s inflation reading would significantly increase the odds of a rate hike and necessitate revising the projection of an unchanged policy rate in the US.

US inflation data becomes next key test for rate outlook

Traders' attention has now shifted to the upcoming August inflation data, due on Friday, September 11, after the stronger-than-expected jobs report. Policymakers have expressed greater concern over inflation, which has remained above the Fed's 2% target for the past 5½ years.

In his maiden Jackson Hole address, Warsh warned that inflation was not slowing meaningfully and reaffirmed that policymakers remained committed to returning inflation to their 2% target.

Ahead of the CPI report, the European Central Bank is widely expected to hike rates to stave off energy-driven inflation, while Treasury auctions will test bond demand as yields remain near multi-year highs.

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