Rate Cut Expectations get Repriced

Inflation jumps

September 12, 2025 • Estimated Reading Time: 3 minutes

What Just Landed

  • CPI for August came in hotter than some feared: +0.4% month-over-month, pushing the year-over-year rate up to 2.9%, from 2.7%. Core inflation (food + energy excluded) also ticked up to 3.1% YoY.

  • The reading was strong in categories like shelter, used cars/trucks, apparel, airline fares — things consumers feel.

What the Market is Pricing In via CME FedWatch

Here’s how expectations shifted post-CPI:

Cut Size

Approximate Implied Probability

25 bps

Huge favorite — ~90-92% chance for a 25 bps cut at the next FOMC meeting 

50 bps

Still low, but rising — ~10-17% chance priced in for a 50 bps cut, up from lower odds before the CPI print 

No cut

Almost zero — markets seem confident something will move, though how much is debated 

So the baseline is still 25 bps, but there’s just enough worry now that a more aggressive move (50 bps) isn’t off the table.

Why This Matters

  • Fed has been under pressure: inflation is sticky, tariffs are feeding into goods/consumer prices, labor market showing signs of strain. The CPI is giving them no easy path.

  • If Fed doesn’t cut or signals that cuts are far off, risk assets (stocks, crypto) may get hit. Conversely, even the expectation of cuts tends to generate speculative flow — think Bitcoin, gold, etc.

Scenarios for the Next Few Weeks

Here’s how I see things potentially playing out:

  1. 25 bps Cut, But Cautious Dovish Tone

    Fed cuts by 25 bps in September, but emphasizes data-dependence. If Powell signals inflation’s still a threat, we get a mild relief rally — equities and crypto bounce, bonds flatten or rally a bit, dollar may dip.

  2. 50 bps Surprise Cut / More Dovish Than Expected

    Relatively low probability, but if coming data (PCE, jobs) supports it, Fed might go bigger. That would likely trigger a sharp rally in risk assets, potentially pushing BTC/ETH higher, sharper drop in yields, weaker dollar.

  3. No Cut or Push-Out Cut Date

    If inflation remains sticky, or if Fed leans hawkish, they could push back cuts. That risks a sell-off in risk assets, dollar strength, bond yields rising. Crypto may get hurt more violently than stocks.

  4. Data Flip

    Sometimes the narrative shifts fast. One weak CPI or PPI reading (or strong jobs slip) + dovish Fed commentary = sudden re-pricing toward more aggressive cuts. Traders will be watching for that.

Bottom Line

CPI just reminded us: inflation isn’t going quietly. The Fed is under the gun, and while markets still overwhelmingly expect a 25 bps cut, there’s now a credible argument for more aggressive easing — and that’s changing behavior in crypto, stocks, and bonds.

If you want, I can pull up a visual of the FedWatch probabilities over time (pre-CPI vs now) so you can see how much market expectations shifted.