US Government Bond 5Y vs Effective Federal Funds Rate: why the prices moved differently

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  Weak September Jobs Report Slashes October Hike Odds The US added only 29,000 jobs in September, far below the 89,000 expected, and unemployment rose to 4.2%. Investors now see an 84% chance the Fed holds rates steady at its October meeting, up from 36% a week earlier. Lower odds of an October hike pull the expected federal funds rate down.

  This is the biggest new force this period, directly cutting near-term rate expectations.

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  Soft PCE Inflation Gives Fed Room to Wait August PCE inflation came in below expectations, with core prices up just 0.2% for the month and 3.0% year-over-year. That reduced the odds of an October hike from 70% to about 42%. Softer inflation means less pressure on the Fed to raise rates soon, which lowers the expected funds rate.

  This is a new data point that directly reduces the urgency for a near-term hike.

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  Fed Minutes Confirm Another Hike Likely by Year-End Minutes from the Fed's September meeting show most officials still expect one more rate hike before the end of 2026, though they did not specify when. Markets now price an 85% chance of a December hike. This keeps the expected funds rate higher for longer, supporting EFFR.MM.

  This is new information from the minutes that keeps upward pressure on the rate despite weak October odds.

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  Oil Above $100 and Middle East Tensions Keep Inflation Risk Alive Brent crude rose back near $105 as Trump reportedly weighs new strikes on Iran. Higher oil prices feed inflation fears, making the Fed more likely to tighten. This supports a higher EFFR.MM even as weak jobs data temporarily lowers October hike odds.

  This is a new geopolitical development that adds upward pressure on rates via inflation.

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  Fed officials line up behind more hikes Chicago Fed's Goolsbee, Governor Barr, Philadelphia Fed's Paulson and New York Fed's Williams all said this week that rates likely need to go higher to bring inflation down to 2%. When voting and influential officials say this, investors expect the actual rate to rise, pushing EFFR.MM up.

  Multiple Fed officials explicitly signaling more hikes directly raises the expected path of the fed funds rate.

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  Strong September PMI data lifts October hike odds to ~70% The September flash PMI jumped to 58.4, a five-year high, showing the economy is running hot. That makes the Fed more likely to hike again, and markets now price about a 70% chance of a quarter-point increase at the October 27-28 meeting, up from 55% a week earlier. Higher expected rates lift EFFR.MM.

  The PMI surprise is the key new data point that shifted market odds for an October hike sharply higher.

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  Investors now bet on two more hikes in 2026 After the strong data and official comments, traders raised bets to a 66% chance of an October hike and a 50% chance of another in December, up from 55% and 42% a week ago. If both happen, the fed funds rate would rise to 4.25-4.50%, pulling EFFR.MM higher.

  This shows the market's expected path for the fed funds rate has shifted up, which is what EFFR.MM tracks.

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  AI investment boom adds to inflation pressure Goolsbee and Paulson both warned that massive AI data-center spending is boosting demand beyond what the economy can supply, keeping inflation sticky. If the Fed sees AI as an inflation driver, it may need higher rates to cool other spending, which supports a higher EFFR.MM.

  A new structural force (AI-driven demand) that could keep upward pressure on rates even if other inflation sources fade.

Based on 17 stories →

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  Fed delivers first rate hike in three years, raises target to 3.75–4.00% The Fed raised its benchmark rate by 0.25% to 3.75–4.00% on September 16, the first hike since 2023, in a unanimous 12-0 vote. This directly lifts the effective federal funds rate, which tracks the Fed's target range.

  This is the actual policy decision that sets the EFFR, making it the most important driver of the period.

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  Fed signals one more hike in 2026, higher-for-longer path The Fed's dot plot shows 16 of 18 officials expect at least one more hike this year, with the median year-end 2026 rate at 4.1%. This tells investors rates will stay higher for longer, keeping upward pressure on EFFR.MM.

  Forward guidance about future hikes shapes expectations for where EFFR will go next, beyond the current move.

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  Oil above $100 and sticky inflation force Fed's hand Crude oil surged past $100–$108 on Middle East supply fears, and core inflation remains near 3.4%. These price pressures make the Fed more likely to keep raising rates, pushing EFFR.MM higher.

  Inflation and oil are the root causes forcing the Fed to hike, explaining why EFFR is moving up.

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  Trump pressures Fed to cut to 1%, but Warsh defends independence After the hike, Trump urged the Fed to cut rates to 1% or lower, calling the hike political. But Warsh has defended Fed independence, so this is a real but uncertain counterweight that could lower EFFR.MM if it sways policy.

  This is the main opposing force that could push EFFR down, providing a fair counterweight to the hike.

Based on 24 stories →

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  Fed delivers first hike since 2023, lifts EFFR directly The Fed raised its target range by 0.25% to 3.75–4.00% on September 16, a unanimous 12-0 vote and the first hike since 2023. Because EFFR.MM tracks this target, the actual rate moves up right away.

  This is the single biggest direct driver of EFFR.MM this period.

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  Fed signals higher-for-longer, dot plot points to more hikes The Fed's projections show 16 of 18 officials expect at least one more hike in 2026, with four seeing two more. That tells investors rates stay higher for longer, keeping upward pressure on EFFR.MM even after this hike.

  Forward guidance keeps expected rates elevated, which supports EFFR.MM.

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  Oil above $100 and sticky inflation force the Fed's hand Middle East attacks pushed Brent above $105–$108 and WTI above $100, while core inflation stayed near 3.4%. Higher energy costs feed inflation fears, making the Fed more likely to keep raising rates, which pushes EFFR.MM up.

  Oil-driven inflation is the main economic force behind the hike and further tightening expectations.

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  Goldman flips to call for an October hike Goldman Sachs changed its forecast twice in four days and now expects another 0.25% hike in October, citing the Fed's higher inflation forecasts and Warsh's comments. If that happens, EFFR.MM would rise again to 4.00–4.25%.

  A major bank's call for a near-term follow-up hike raises expected rates, supporting EFFR.MM.

Based on 19 stories →

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  Blowout August Jobs Report Lifts Rate-Hike Odds The U.S. added 162,000 jobs in August, nearly triple the 53,000 expected, and unemployment held at 4.1%. That strength tells investors the economy can handle higher rates, so the odds of a September Fed hike jumped from about 49% to 58% and kept climbing. Higher expected rates lift EFFR.MM.

  This is the first major new data point this period that reset rate expectations upward.

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  Firmer PPI and Hot Core CPI Push Hike Odds to ~87% Producer prices rose 5.4% year over year, above the 5.3% expected, and August core consumer prices rose 0.3% for the month, hotter than the 0.2% forecast. With inflation still sticky, traders now price an 85.8% chance of a quarter-point hike on September 16, up from 72.4% a day earlier. Higher expected rates lift EFFR.MM.

  This is the latest and most decisive new inflation data that drove hike odds sharply higher.

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  Trump Pressures Fed to Cut, Threatens Trade Measures President Trump threatened to suspend trade with surplus countries if the Fed doesn't cut rates before the September 15-16 meeting, and his advisers called a hike 'reckless.' This political pressure could sway the Fed to hold or cut, which would lower EFFR.MM. But Chair Warsh has defended Fed independence, so the effect is a real but uncertain counterweight.

  This is a genuine counterforce that could pull rates down, and readers need to see it alongside the hike odds.

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  War and AI Boom May Blunt Rate Hikes, But Fed Still Expected to Move Analysts warn that Fed rate hikes may have limited effect on inflation driven by the Iran war, tariffs, and massive AI investment, which are less sensitive to interest rates. Even so, the Fed has signaled readiness to hike and futures price roughly 70% odds, so the expected funds rate remains elevated. This keeps upward pressure on EFFR.MM.

  It explains why the Fed is still expected to hike despite doubts about its effectiveness, supporting the upward move in EFFR.MM.

Based on 11 stories →

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  Warsh's Jackson Hole speech lifts September rate-hike odds to ~60% Fed Chair Warsh's first Jackson Hole keynote was hawkish: he said the Fed will 'have work to do' if inflation isn't clearly heading to 2%, and rejected forward guidance. Markets now price a 55-66% chance of a September hike, up from ~35% before the speech. Higher expected rates lift EFFR.MM.

  This is the main new event of the period and directly raises the expected federal funds rate.

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  Barclays and other analysts now forecast two hikes (Sept and Dec) Barclays reversed its call and now expects the Fed to raise rates in both September and December, each by 25 basis points. Other banks also see more tightening ahead. This adds to expectations of a higher policy rate, pushing EFFR.MM up.

  New analyst forecasts reinforce the upward pressure on expected rates.

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  Oil surge on US-Iran conflict adds to inflation and hike pressure Renewed US-Iran fighting pushed Brent above $90 and WTI above $85, raising inflation concerns. Higher oil prices make the Fed more likely to hike to fight inflation, which lifts the expected federal funds rate.

  A new geopolitical supply shock that feeds into inflation and rate-hike expectations.

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  Waller signals he may support holding rates steady Fed Governor Waller said he could support holding rates steady at the September meeting, urging markets to 'give disinflation a chance.' His comments cut hike odds from 63% to about 50%, lowering the expected federal funds rate. This is a real counterweight to Warsh's hawkish stance.

  A key dissenting voice that reduces the probability of a hike, balancing the positive drivers.

Based on 24 stories →

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  Warsh's Jackson Hole speech jolts rate-hike odds to ~60% Fed Chair Warsh said the Fed will 'have work to do' if inflation isn't clearly heading to 2%, and that financial conditions aren't restrictive. Traders now price about a 55-60% chance of a September hike, up from roughly 35% before the speech. Higher expected rates lift EFFR.MM.

  This is the period's decisive new event: it directly reset market odds for the fed funds rate.

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  Hammack and other officials push for immediate tightening Cleveland Fed President Hammack said the Fed is far from its inflation target and should tighten now; she was one of three July dissenters who voted to hike. Officials openly backing hikes reinforce the market's move toward expecting higher rates.

  It shows the hike signal is not just Warsh's personal view but has committee support.

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  Treasury bond buybacks and global savings squeeze pull the other way The Treasury doubled purchases of long-dated bonds to push yields down, which could offset Fed tightening and delay a hike. But a global savings squeeze and heavy AI borrowing are pushing long-term yields up anyway, so the net effect on expected rates is uncertain.

  It is the real counterweight: it could soften the case for hikes even as inflation stays high.

Based on 15 stories →

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  Fed minutes show many officials now favor rate hikes The July Fed meeting minutes revealed that many officials believe rate hikes will be needed if inflation stays above 2%. Three officials already voted to hike. This makes traders expect higher rates ahead, pushing the expected federal funds rate up.

  This is the most direct and important new signal about the future path of the federal funds rate.

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  Core inflation stuck near 3.3% keeps pressure on Fed Core inflation, which strips out food and energy, remains near 3.3% — well above the Fed's 2% goal. Tariffs and supply-chain issues keep prices high. This persistent inflation forces the Fed to consider raising rates, lifting the expected funds rate.

  Persistent core inflation is the fundamental reason the Fed may hike, directly driving rate expectations.

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  Weak retail sales cut odds of near-term hikes July retail sales fell 0.6%, the first drop in nine months and worse than expected. Consumers are pulling back, which slows the economy. This makes traders bet the Fed will hold off on hiking until at least December, lowering the expected funds rate.

  Weak consumer spending is a key counterweight that reduces the urgency for rate hikes.

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  Treasury buybacks and Fed silence add uncertainty The Treasury is doubling buybacks of long-term bonds to lower yields, but JPMorgan warns it may not work and could raise long-term rates. Meanwhile, the Fed's lack of guidance and possible credit downgrade add volatility. The net effect on the expected funds rate is unclear.

  This shows a real counterweight and uncertainty that could push rate expectations in either direction.

Based on 6 stories →

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  Weak July jobs report cuts September hike odds July payrolls fell 23,000, far below the expected 85,000 gain, and prior months were revised lower. Investors now see a September rate hike as much less likely, with odds falling from 67% to around 40-44%. This lowers the expected federal funds rate.

  This is the main new data point that shifted market expectations for the Fed's next move.

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  Weak retail sales and consumer confidence push hike odds even lower July retail sales fell 0.6%, the first drop in nine months and the biggest in 14 months, badly missing forecasts. Consumer confidence also weakened. By August 14, traders saw only a 28.6% chance of a September hike, down from above 50% a week earlier, as investors bet rates stay at 3.50%-3.75%.

  This is the newest data showing the consumer is slowing, which directly reduces the chance of a rate hike.

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  Fed officials and BofA still point to higher rates Kansas City Fed President Schmid said policy may need to tighten further, and three Fed officials voted to hike in July. Bank of America expects 75 basis points of additional hikes in 2026, bringing the rate to 4.25%-4.50%. This keeps upward pressure on the expected funds rate.

  This is the main counterweight: not everyone agrees the Fed is done, and some still expect hikes.

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  Warsh's communication shift and balance-sheet plans tighten policy Chair Warsh is reducing forward guidance and wants to shrink the Fed's $6.75 trillion balance sheet. Both moves can push long-term rates higher even without raising the official funds rate. This adds to uncertainty and keeps upward pressure on borrowing costs.

  This explains a new way the Fed could tighten policy beyond just changing the funds rate target.

Based on 12 stories →

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  Fed officials signal readiness to hike rates Multiple Fed officials, including Governor Cook and three FOMC dissenters, said they are prepared to raise rates if inflation stays high. Chair Warsh also said he has 'no tolerance' for elevated inflation and is ready to hike in September if data confirm rising prices. This pushes the expected federal funds rate up.

  Directly raises the expected path of the policy rate, which is what EFFR tracks.

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  Inflation stays high on tariffs and Iran war Inflation is running at a three-year high of 4.2%, driven by Trump's tariffs on over 80 countries and the Iran war that closed the Strait of Hormuz, pushing energy and input costs higher. This persistent inflation forces the Fed to consider rate hikes, lifting the expected federal funds rate.

  Explains the underlying inflation pressure that is driving the Fed toward rate hikes.

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  Weak July jobs report slashes rate-hike odds July payrolls fell by 23,000, far below expectations, and prior months were revised lower. Investors now see a September rate hike as less likely, with the probability dropping from 67% to around 40-44%. This lowers the expected federal funds rate.

  Directly reduces the probability of a near-term rate hike, pulling the expected policy rate down.

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  Fed credibility doubts cut both ways Markets question the Fed's commitment to fighting inflation, with long-term bond yields rising and critics saying Warsh's tough talk lacks action. Some warn this could force the Fed to hike more later to regain credibility, while others see it as a reason the Fed may hold off. The net effect on the expected funds rate is uncertain.

  Shows a real counterweight: credibility concerns could push rates up or down, making the overall direction mixed.

Based on 20 stories →