Freedom Broker: the probability of a Fed rate hike remains close to 50/50

The likelihood that the U.S. Federal Reserve will raise the interest rate at its September 16 meeting stands at 58%, so there is still no clear market consensus, Freedom Broker analysts note. Fresh data on consumer and producer inflation, due to be released ahead of the regulator’s meeting, will be decisive.

Market keeps expectations of a rate hike

The futures market is pricing the September meeting rate at 3.78%, Freedom Broker experts note. That is about 15 basis points above the current effective federal funds rate of 3.63% and corresponds to an approximately 58% probability of a 25-basis-point hike.

Compared with the previous week, the expected level of the September rate has not changed. Thus, the market still leans toward tighter monetary policy, but the probability of such a decision remains only slightly above 50/50.

Farther out, expectations shifted in mixed fashion. The rate path for meetings from December 2026 through April 2027 fell by about 4–5 basis points, while two-year forward rates rose by roughly 4–9 basis points. In Freedom Broker’s view, the market allows for a near-term hike but does not extend an aggressive tightening scenario across all maturities.

Market does not expect prolonged tightening

The U.S. Treasury yield curve already reflects about 50 basis points of rate increases over the next two years. At the same time, Freedom Broker believes any Fed moves would be targeted—one or two hikes—and would not turn into a prolonged tightening cycle.

In such a scenario, a rate hike would most likely lead to a flattening of the yield curve. Pressure may be more pronounced in short-term bonds, while yields on longer-dated securities could stabilize.

Over the week, the yield on two-year Treasuries rose from 4.35% to 4.37%, or by 2 basis points. The yield on five-year notes was almost unchanged at 4.31%, while the 10-year yield increased from 4.72% to 4.78%, or by 6 basis points. The spread between 10-year and two-year yields widened by 4 basis points to 42 basis points.

Treasury to hold three auctions

The week will be shortened due to the U.S. Labor Day holiday. On Tuesday, $58 bn of three-year Treasury notes will be auctioned; on Wednesday, $39 bn of 10-year notes; and on Thursday, $22 bn of 30-year bonds. Long-dated auctions have generally been stable lately. According to Freedom Broker, this points to no noticeable decline in demand for long-term U.S. Treasuries.

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