Fed Watch — the September 16, 2026 FOMC decision: Hike 25bps priced at 61%, Taylor rule 5.12%

14 days to the decision (statement 2:00 PM ET). Kalshi prediction-market odds as of September 2, 2026: Hike 25bps 61.2%, Fed maintains rate 37.3%, Hike >25bps 1.5% — a probability-weighted move of +16bp. The effective fed funds rate is 3.63% (2026-08-31), a 3.5–3.75% target range inferred from EFFR.

The Taylor rule today

i = r* + π + 0.5(π − 2) + 0.5·gap, gap = okun·(NAIRU − u) with r* 1%, NAIRU 4.2%, Okun 2: core PCE 3.34% (July 2026) and unemployment 4.1% (July 2026) prescribe 5.12%, +149bp versus the actual rate. The inertial rule the Fed follows in practice (i_t = 0.85·EFFR_(t−1) + 0.15·i_Taylor,t) prescribes 3.85% (+22bp); with the Nowflation core-PCE nowcast of 3.34% for August 2026 the plain rule reads 5.11%. Monthly history since 2017-01; r* and NAIRU are adjustable on the page.

What the Fed sees

• Core PCE (target variable): 3.34% (July 2026), +1.34pp vs the 2% target; Nowflation nowcast for August 2026: 3.34%
• Headline PCE 3.7% · trimmed-mean PCE 2.28% · core CPI 2.5% · headline CPI 3.4% (July 2026) — Nowflation CPI nowcast 3.29% headline, 2.32% core for August 2026 · sticky CPI 2.72%
• Expectations: 5-year breakeven 2.37%, 5y5y forward 2.33%, Cleveland Fed 1-year 2.39%, Michigan 1-year 4.2%
• Labor: unemployment 4.1% (July 2026) vs an assumed 4.2% NAIRU, Sahm rule -0.03, payrolls +20k/month over three months, Nowflation payroll nowcast +73k for August 2026, initial claims 205.5k (4-week average)
• Curve (2026-08-31): 2-year 4.34%, 10-year 4.75%, 10y−2y +0.40pp, 10y−3m +0.87pp, 10-year TIPS real yield 2.44%, 5-year breakeven 2.37%

Before the decision: jobs report for August 2026 on September 4, 2026; CPI for August 2026 on September 11, 2026 — each graded on the scoreboard.

Taylor (1993) rule with an Okun’s-law output gap, computed monthly on core PCE YoY (PCEPILFE), the unemployment rate (UNRATE) and the monthly average effective fed funds rate (EFFR); the inertial variant lags the prior month’s actual EFFR at 0.85, the Federal Reserve’s Monetary Policy Report convention. Market-implied change = Σ probability × move, with “>25bp” outcomes priced at 50bp. Year-over-year rates are computed from index levels; CPI on NSA indexes (BLS convention). Curve series are the last observation of each week. Sources: FRED / Federal Reserve Board, BEA, BLS, the Dallas, Atlanta and Cleveland Feds, Kalshi public market data (display only), Taylor (1993). Odds history is logged daily from 2026-09-01.

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