Contracts had priced roughly 85 percent odds of a quarter-point move. The real debate now is October versus December.
Prediction market contracts tied to the Federal Reserve's September decision had priced roughly 85 percent odds of a quarter-point rate increase heading into Wednesday's meeting. The Fed delivered exactly that outcome, raising its benchmark rate to a range of 3.75 percent to 4 percent, its first increase in three years. Fed Chair Kevin Warsh described the move as part of a "timelier return" to the central bank's 2 percent inflation goal.
That the market-implied odds matched the outcome does not mean the pricing caused it. It reflects that traders correctly weighed the available evidence going into the meeting, and it says nothing on its own about whether the underlying decision was the right one.
The next call is far less settled
Attention has now shifted to the Fed's next move, and there is no similar consensus. The CME Group's FedWatch tool points to a 53 percent probability of another rate increase at the Fed's October meeting. Goldman Sachs economists agree with an October call, but several other major banks, including ABN Amro, Barclays, BNP Paribas, Deutsche Bank, JPMorgan, Morgan Stanley and Nomura, expect the next increase to come in December instead.
Why the split matters
A roughly even split between October and December is a meaningfully different signal than the lopsided odds that preceded Wednesday's decision. It suggests the incoming economic data between now and the Fed's next meeting, rather than any settled expectation, will determine the timing of the next move. That puts unusual weight on data releases in the coming weeks, since a market this evenly divided can move sharply on a single report.
What to watch
Whether upcoming inflation and labor market data pushes the October probability meaningfully above or below 50 percent will be the clearest early signal of which camp of economists is closer to being right.