Interest Rate Hike Probability Rises from 37% to 67% in a Week, New York Fed President: Long-Term Bond Yields Reflect Economic Strength

Oil prices remain steady above $90, coupled with escalating geopolitical tensions between the U.S. and Iran, inflation concerns continue to rise, reinforcing expectations that the Federal Reserve needs to tighten monetary policy further. Williams stated that the rise in long-term bond yields is due to economic strength and emphasized that more data is needed before making decisions, which slightly cooled market expectations for a rate hike. The non-farm payroll data on Friday and the CPI data on September 11 will be key variables, and Thursday's speech by Fed Governor Waller is also highly anticipated.

Market bets on a rate hike by the Fed this month have surged dramatically within a week, but comments from a Fed official provided marginal relief to the tense bond market.

According to the CME Group's FedWatch tool, market expectations for a 25 basis point rate hike by the Fed this month have soared from 37% a week ago to about 67%, an increase of nearly 30 percentage points.

This shift in expectations reflects the market's judgment that inflation pressures remain high and economic data is generally strong. New York Fed President Williams' speech on Wednesday helped to cool these rate hike expectations to some extent, leading to a slight retreat in U.S. Treasury yields on Thursday, providing temporary relief to the bond market.

However, from an overall perspective, the pressure faced by bond investors has not materially eased. Oil prices continue to hold above $90 per barrel, and the escalating geopolitical tensions between the U.S. and Iran further exacerbate inflation concerns, highlighting the necessity for central banks to maintain a tightening stance.

Surge in Rate Hike Probability: Inflation and Geopolitical Risks Drive Together

The probability of a rate hike this month jumped from 37% to 67% in just one week, driven by multiple overlapping factors. Oil prices remain above $90 per barrel, and the escalation of U.S.-Iran tensions is putting further pressure on energy prices, which in turn raises market concerns about inflation prospects, reinforcing expectations that the Fed needs to continue tightening monetary policy.

At the same time, upcoming key economic data keeps the market on high alert. The ADP employment data released on Wednesday fell short of expectations, but the market is more focused on the U.S. non-farm payroll report due on Friday and the Consumer Price Index (CPI) data on September 11.

These two data points will directly impact the Fed's policy path judgment and are key variables in whether current rate hike expectations can be further strengthened.

Williams' remarks on Wednesday provided some marginal support for market sentiment. He stated that the rise in long-term bond yields reflects the robustness of the economic fundamentals rather than uncontrolled inflation expectations, emphasizing that more data is needed before making interest rate decisions.

Analysts believe that this statement was interpreted by the market as the Fed is not in a hurry to lock in a rate hike path, providing some correction space for previously over-priced rate hike expectations.

However, Williams' speech only provided marginal easing and did not fundamentally change the market's mainstream expectations for a rate hike. The next Fed official to watch is Governor Waller, who will speak on Thursday. Waller had indicated in July that further rate hikes may be needed soon, and his latest remarks could have a new impact on market expectations.

Additionally, it is worth noting that high oil prices, sticky inflation expectations, and the Fed's high rate hike probability still pose significant uncertainty for bond investors.

After Waller's speech, the non-farm data on Friday and the subsequent CPI report will be important tests of whether current rate hike expectations are sustainable and will largely determine the direction of the bond market in the next phase.