2026-08-08

Fed September Hike Odds Crash From 57% to 44% as Waller Breaks With Warsh - S&P 500 Closes at Record 7,757

Written & reviewed by the TradeSmrt editorial team · 2026-08-08

In this article

What Happened
Why a Rate Hike, Not a Cut, Was the Thing Markets Feared
Waller's Pivot - A Widening Split Inside the Fed
What This Means for Investors in Practice
What to Take Away From This
Sources

What Happened

In the space of a single trading day on August 7, the market's read on U.S. monetary policy flipped dramatically. Just the day before, rate futures had priced in a 57% chance that the Federal Reserve would raise rates at its September meeting. After the July jobs report landed showing nonfarm payrolls fell by 23,000, that probability collapsed to 43.9%, according to LSEG data - a swing of more than 13 percentage points in a matter of hours. The odds of a hold jumped in the opposite direction, from 43.2% to 60.4%. The CME Group's FedWatch tool told the same story: September hike odds fell to around 40%, with hold odds near 60% - a sharp reversal from the prior day, when hold odds stood near just 45% (implying hike odds near 55%), and an even bigger shift from roughly a third just a week earlier.

Bond and equity markets reacted immediately and in the same direction. Treasury yields fell, and all three major U.S. indexes rallied. The S&P 500 closed up 47.68 points, or 0.62%, at a record 7,757.64. The Nasdaq Composite jumped 342.26 points, or 1.30%, to 26,690.62, while the Dow Jones Industrial Average rose 151.83 points, or 0.28%, to 54,036.93. The weekly numbers were even more striking: the S&P 500 gained 3.58% for the week, the Nasdaq climbed 5.19%, and the Dow added 2.96% - each index's best weekly performance since April. That's a notable reversal of the usual playbook, where a jobs shock signaling economic weakness typically weighs on stocks. Here, the dominant read was that a specific risk - a rate hike - had just become less likely, and that alone was enough to push indexes to fresh records.

Why a Rate Hike, Not a Cut, Was the Thing Markets Feared

To understand why this reaction looks unusual, it helps to look at the specific policy backdrop the Fed has been operating under this year. In a typical cycle, a weak jobs report makes markets worry that rate cuts will be delayed. But under new Fed Chair Kevin Warsh, the dynamic has run the other way. Since taking over, Warsh has consistently signaled "zero tolerance for inflation," and at the July 29 FOMC meeting, nine policymakers voted to hold rates steady while three regional presidents - Cleveland's Beth Hammack, Minneapolis's Neel Kashkari, and Dallas's Lorie Logan - dissented in favor of a hike. At his press conference that day, Warsh described the internal disagreement as a "good family fight" while insisting the committee remained unified on price stability. In the immediate aftermath of that press conference, FedWatch-implied September hike odds spiked as high as 78.8% before settling near 60.1% - meaning markets were already assigning real weight to the unusual scenario of the Fed hiking rather than cutting, well before the jobs data came out.

That context is what makes the July jobs shock's market impact so different from what a textbook would predict. The familiar "weak data equals rising cut expectations" formula didn't really apply here, because the thing markets had been bracing for wasn't a delayed cut - it was an actual hike. So when the jobs numbers missed badly, what got priced out wasn't hope for easier policy so much as relief that the Fed would probably not tighten further. That relief alone was enough to send the S&P 500 to a fresh record.

Waller's Pivot - A Widening Split Inside the Fed

The other notable figure in this story is Fed Governor Christopher Waller. In recent remarks, Waller said he supports a 25-basis-point rate cut at the September meeting and left the door open to further cuts over the next three to six months if the labor market keeps deteriorating. That stance sits in direct tension with the hawkish line Warsh has pushed since taking the chair. Combined with the three regional presidents who dissented in favor of a hike at the July meeting, the committee now shows daylight opening up on both flanks at once - hawks pushing for a hike, and at least one governor now publicly breaking ranks to argue for a cut.

Ellen Zentner, chief economic strategist at Morgan Stanley Wealth Management, offered a measured take on the shift: "Today's weak payrolls print may ease the pressure on the Fed to raise rates at its September meeting, but next week's inflation data will still likely be the deciding factor." That's an important qualifier. The jobs shock meaningfully reduced the odds of a hike, but it didn't fully tip the balance toward a hold, and the case for an outright cut remains a minority view centered on Waller. Next week's Consumer Price Index release is now the market's next real test of which of the three scenarios - hike, hold, or cut - ultimately wins out.

What This Means for Investors in Practice

This episode is a clean illustration of how the same economic data point can be read in opposite ways depending on the policy regime the Fed is actually operating under. Had the Fed been in a conventional easing cycle, this jobs shock likely would have accelerated expectations for faster, deeper cuts, pulling Treasury yields down further and giving an extra lift to growth stocks. Instead, because the market had been bracing for the opposite scenario - a hike - the same data produced a relief rally built on avoiding the worst-case outcome rather than optimism about looser policy ahead. The practical takeaway is that reading any single data release requires first understanding what the market was actually afraid of going in, not just whether the number itself was "good" or "bad" in isolation.

The episode also underscores why tracking the range of opinions inside the Fed matters as much as the headline policy statement. Warsh's hawkish messaging, the three regional presidents' dissent in favor of a hike, and Waller's public pivot toward a cut are all pulling in different directions. The wider that internal spread gets, the harder it becomes to draw a confident conclusion about the next move from any single data point alone. In that kind of environment, it makes more sense to track the frequency and tone of individual officials' comments and to watch for the next confirming data point - in this case, next week's CPI report - rather than assuming a resolution. It's also worth remembering that a record index close doesn't equal resolved uncertainty. Because this rally was built on relief rather than conviction, a CPI surprise in either direction next week could just as easily unwind part of the move.

The rally's gains were not evenly distributed across sectors, either. The fact that the Nasdaq outpaced the Dow by such a wide margin shows that this relief rally concentrated disproportionately in rate-sensitive growth and technology names. When hike risk recedes, high-valuation stocks that discount far-future earnings back to present value tend to benefit more, since the discount-rate pressure eases more sharply for them. More traditional cyclical and value-tilted names, which make up a larger share of the Dow, posted comparatively modest gains by contrast. Reading the sector split alongside the index-level headline gives a sharper picture than treating this as simply "stocks went up" - it shows that the relief specifically flowed toward the parts of the market most sensitive to the rate path.

What to Take Away From This

Read rate-sensitive data in the context of what the Fed was already expected to do. The same jobs shock can trigger a cut-expectations rally in an easing cycle or a hike-fear relief rally in a tightening-leaning regime - know which regime you're in before interpreting the reaction.
Internal Fed dissent is signal, not noise. Regional president dissents and shifts in individual governors' public comments are useful leading indicators of where the committee's center of gravity may be heading.
A record index close doesn't mean uncertainty is resolved. Relief-driven rallies can unwind quickly if the next confirming data point - in this case, CPI - comes in worse than expected.
Cross-check probability data across sources. LSEG and CME FedWatch use different methodologies; comparing the two gives a more reliable read on where market consensus actually stands.

For more on the jobs shock itself and Chair Warsh's inflation-first stance, see July Jobs Shock: Payrolls Fall 23,000. For how the same data moved precious metals, see Gold Jumps 2.6% to Touch $4,400 an Ounce.

Sources

This article synthesizes and analyzes the reporting below in our own words - it is not a reproduction of the original text. For the latest figures and full detail, please refer to the original sources.

⚠️ This article is for informational purposes only and is not investment advice. Market conditions change constantly - always verify the latest data yourself before making any investment decision.