Expectations for the US interest rate hike in September continue to cool down! Retail sales and consumer confidence weaken, and the market is betting that the probability of keeping interest rates unchanged will rise to 71%

The Zhitong Finance App learned that with the latest US retail sales and consumer confidence data both weakening, the market's expectations that the Federal Reserve will continue to raise interest rates in September have cooled down further. The weak performance of a series of economic and inflation data this week prompted traders to clearly lower their bets on the Federal Reserve's further tightening of monetary policy.

According to the CME FedWatch tool, as of Friday, the market expects the Federal Reserve to raise interest rates by 25 basis points at the September 16 meeting, and the probability of raising the federal funds rate target range from the current 3.50%-3.75% to 3.75%-4.00% has dropped to 28.6%. In contrast, this probability was 33.9% a day ago, 44.4% a week ago, and still reached 50% a month ago.

Currently, keeping interest rates unchanged has become a more clear benchmark expectation for the market. Federal funds rate futures show that the probability that the Federal Reserve will maintain interest rates at 3.50%-3.75% in September will rise to 71.4%.

Expectations of interest rate hikes declined further, mainly driven by two weak economic data released on Friday. Retail sales in the US unexpectedly declined in July, while the initial value of the University of Michigan's consumer confidence index fell to 51 in August, the first decline in three months, indicating that US consumer spending and confidence levels are cooling down against the backdrop of continued price pressure and uncertainty about the economic outlook.

At the same time, the inflation data released this week also reduced the urgency for the Federal Reserve to raise interest rates further in the short term. The increase in the US consumer price index (CPI) slowed in July, while the producer price index (PPI) remained flat month-on-month, indicating that some price pressure is easing. Employment, consumption, and inflation data continued to weaken, causing the market to further reduce previously aggressive interest rate hikes expectations.

The forecast market also reflects this change. Kalshi currently predicts that the probability that the Federal Reserve will raise interest rates again before 2027 is about 54%, which is a significant decrease from earlier this month. Polymarket traders, on the other hand, believe that the probability that the Federal Reserve will raise interest rates at least once more within 2026 is only 51%, which is a sharp drop from the high of close to 80% at the end of July and the beginning of August.

As Federal Reserve Chairman Walsh reduced forward-looking guidance on future interest rate paths, the impact of economic data on market interest rate expectations increased markedly. Looking at it now, recent data such as consumption and inflation have all reduced the possibility of interest rate hikes in September, and market expectations have clearly shifted to the Fed continuing to stand still.