Market expectations for a September interest rate hike by the Federal Reserve have further cooled, following the release of weaker-than-expected US retail sales and consumer confidence data.

A series of soft economic and inflation figures this week prompted traders to significantly reduce their bets on further monetary policy tightening. According to the CME FedWatch Tool, as of Friday, the probability of the Fed raising the federal funds rate target range by 25 basis points at its September 16 meeting—from the current 3.50%-3.75% to 3.75%-4.00%—has dropped to 28.6%. This compares to 33.9% a day earlier, 44.4% a week ago, and 50% a month ago. Maintaining the current rate has become the market's more definitive baseline expectation. Fed funds futures now show a 71.4% probability that the Fed will hold rates steady at 3.50%-3.75% in September.

The further decline in rate hike expectations was primarily driven by two weak economic data points released on Friday. US retail sales unexpectedly fell in July, while the University of Michigan's preliminary August consumer sentiment index dropped to 51, its first decline in three months. This indicates that US consumer spending and confidence are cooling amid persistent price pressures and economic uncertainty. Additionally, inflation data released this week has reduced the urgency for the Fed to tighten policy further in the near term. The July Consumer Price Index (CPI) showed a slower increase, while the Producer Price Index (PPI) was flat month-over-month, signaling that some price pressures are easing.

The consecutive soft readings on employment, consumption, and inflation have led the market to further trim its previously more aggressive rate hike expectations. Prediction markets also reflect this shift. Kalshi currently estimates a roughly 54% probability of the Fed raising rates again before 2027, a significant decline from earlier this month. Polymarket traders see only a 51% chance of the Fed implementing at least one more rate hike by the end of 2026, a sharp drop from the near-80% level seen in late July and early August.

With Fed Chairman Jerome Powell reducing forward guidance on the future rate path, the influence of economic data on market rate expectations has strengthened. Currently, recent consumption and inflation data have all lowered the likelihood of a September rate hike, and market expectations have clearly shifted toward the Fed remaining on hold.