2026-09-01

September Rate Hike Odds Jump to 66% While ISM Manufacturing Cools to 54.6% - Prices Index Refuses to Budge From 71

Written & reviewed by the TradeSmrt editorial team · 2026-09-01

In this article

What Happened
Why Slowing Growth and Sticky Prices Is the Fed's Worst Combination
What to Take Away From This
FAQ
Sources

What Happened

Fed Chair Kevin Warsh's Jackson Hole speech on Friday, August 28, didn't stop reverberating after the closing bell. The jump in September hike odds from 35% to 57.5% that day was already the story everyone was watching, but that move kept building over the weekend and accelerated further on Monday, August 31. CME Group's FedWatch tool put the probability of a quarter-point hike at the September 15-16 FOMC meeting at 66.1% that day - nearly double where odds sat before Warsh spoke. CNBC summed up the mood with a headline noting markets increasingly treat a September hike as close to settled, while also flagging in the same piece that "not everyone is convinced."

That skepticism showed up clearly once you looked past the single headline number. Fed funds futures, a separate market-based gauge, priced the odds of a September hike at roughly 60.4%, up from about 56% on Friday but still noticeably below CME FedWatch's 66.1%. Prediction markets told an even more cautious story: Kalshi and Polymarket both had hike probabilities sitting around 48% and 49% respectively - essentially a coin flip, not the near-certainty implied by CME's number. Meanwhile Barclays leaned further into the hawkish camp, forecasting the Fed will deliver two hikes this year - September and December - for a cumulative 50 basis points of tightening.

Markets reacted in real time. Gold slid on Monday and Asian equities weakened as traders digested the more hawkish rate path. Then on Tuesday, September 1, the first major economic release since Warsh's speech added another data point to the debate. The Institute for Supply Management's August Manufacturing PMI came in at 54.6%, down a full point from July's 55.6% and below the 55.2% consensus estimate. The sector stayed in expansion for an eighth straight month, but the direction was unmistakably cooler. New orders fell to 53.7%, down three points from July's 56.7%, and employment printed at 51.2%, missing the 53.0% forecast. Production eased slightly to 58.3% from 58.5%. One subindex, however, refused to move at all: prices held at exactly 71.1%, unchanged from July and still deep in inflationary territory.

Why Slowing Growth and Sticky Prices Is the Fed's Worst Combination

What makes this ISM report matter isn't any single number - it's the combination. New orders, employment, and production all softened together while the prices index stayed pinned near multi-year highs. That's arguably the most uncomfortable pattern a central bank can face. If growth and prices had cooled together, the case for holding or cutting rates would be straightforward. If both had stayed hot, the case for hiking would be equally clean. Instead, growth momentum is visibly fading while cost pressure shows no sign of easing - a pattern that echoes almost exactly what Warsh warned about at Jackson Hole, when he said this summer's softer readings "do not tell me that underlying trends have meaningfully improved." Four days later, the ISM prices index gave that warning fresh backing.

A prices subindex stuck at 71 signals that manufacturers are still broadly absorbing higher input costs on raw materials and components. Layered on top of last month's expanded semiconductor and finished-goods tariffs, that points to businesses continuing to pass tariff-driven cost increases through to end prices for a while longer. For the Fed, the awkward part is that the labor-market signal (employment missing estimates at 51.2%) would normally argue for patience, but with price pressure showing zero relief, that argument loses force. Warsh had already pre-empted it at Jackson Hole by characterizing the labor market as "broadly consistent with full employment" - a framing that removes softening employment as an excuse to hold off on hikes.

The gap between institutional pricing and prediction markets is itself worth watching. CME FedWatch and fed funds futures are built from real money changing hands in derivatives markets, so they tend to reflect how institutions and hedge funds are actually positioning. Kalshi and Polymarket, by contrast, are thinner and more retail-driven, often capturing sentiment rather than committed capital. A gap this wide - 66% versus roughly 48% - suggests institutional money has already started leaning into hike bets while the broader market hasn't fully bought in yet. Whether that gap closes toward CME's number or reverts back toward the prediction markets' more balanced view is one of the more interesting things to track over the next few weeks.

The next catalysts are already on the calendar: the August jobs report due September 4, and the ISM Services PMI due later this week. Given July's jobs report badly missed expectations, the August print carries outsized weight to either confirm or unwind this week's jump in hike odds - which means positioning for volatility around both releases is worth doing now rather than after the fact.

What to Take Away From This

A single speech's aftershocks rarely end on the same day. Warsh's Jackson Hole remarks kept reshaping odds well into the following Monday as traders re-digested the message - a reminder to track the days after an event, not just the immediate reaction.
Slowing growth paired with sticky prices maximizes policy uncertainty. When new orders and employment soften but the prices index holds firm, that's the hardest combination for a central bank to navigate, and it tends to coincide with elevated market volatility.
A gap between institutional pricing and prediction markets is itself a signal. The spread between CME FedWatch (66%) and Kalshi/Polymarket (roughly 48-49%) shows where committed capital and broader sentiment currently disagree - worth watching as that gap narrows.
Subindices often carry more information than the headline number. ISM's 54.6% headline reads as simple cooling, but breaking it into new orders, employment, and prices reveals a much sharper story: growth is fading while costs are not.
Know your next catalysts before they hit. The September 4 jobs report and this week's ISM Services PMI can swing hike odds significantly in either direction, so it pays to have those dates marked in advance.

FAQ

Why do CME FedWatch, fed funds futures, and Kalshi/Polymarket show such different odds?

CME FedWatch and fed funds futures are derived from real-money derivatives pricing, while prediction markets like Kalshi and Polymarket are thinner and more retail-driven, so they tend to capture sentiment rather than committed institutional positioning. A 15-18 percentage point gap, as seen now, reflects a real difference in conviction between institutional and retail-oriented markets.

Why is an eighth straight month of manufacturing expansion being read negatively?

A reading above 50 does mean expansion, but markets are reacting to direction and composition, not the absolute level. New orders and employment softened noticeably while the prices index held at elevated levels - a combination that signals fading growth momentum without any relief on cost pressure, which deepens the Fed's policy dilemma rather than easing it.

What data matters most before the September FOMC meeting?

The August jobs report on September 4 and this week's ISM Services PMI are the two biggest remaining catalysts. Given how sharply July's jobs report missed expectations, the August print alone has the potential to meaningfully move hike odds that currently sit near 66%.

Sources

This article is an original synthesis and analysis based on the reporting below, not a reproduction of the original articles. Please check the source articles directly for the most current figures and details.

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