Bets that the U.S. Federal Reserve will cut interest rates in September have dropped significantly over the past week, as markets prepare for Fed Chair Jerome Powell's speech at Jackson Hole on Friday.

Last week, traders were pricing in a 99 percent chance of a 25 bps rate cut at the next Fed meeting. That is now down to 71.5 percent, according to Investing.com's Fed Rate Monitor Tool.

The drop comes amid hotter-than-expected producer inflation data and some hawkish commentary from some Fed members.

After a modest 0.3% July CPI number last Tuesday, last Thursday's red-hot monthly PPI of 0.9% raised eyebrows among economists.

Today, two Fed heads pumped the brakes on market expectations of a cut at the September FOMC meeting.

First, Kansas City Fed President Jeffrey Schmid, a voting member, said the central bank isn't rushing to cut interest rates, pointing to inflation still running above its 2% target and a resilient labor market.

"We're in a really good spot, and we need very definitive data before adjusting policy," said Schmid. He added that inflation remains "closer to 3 than 2 percent," stressing that "there is work to do" and that "the last mile of inflation is pretty hard."

Separately, Cleveland Fed President Beth Hammack, a non-voting member, voiced concern Thursday that stubborn inflation may rule out an interest-rate cut in September.

In an interview with Yahoo Finance, Hammack said both sides of the Fed's mandate price stability and maximum employment—are under strain, making it important to keep policy "modestly restrictive." Inflation, she warned, is "too high" and "trending up."

"We're missing on inflation, need to stay laser-focused," Hammack said, adding that with current data, she doesn't "see a case for a September cut."

While markets still overwhelmingly expect a rate cut in September, traders will be analyzing every word from Powell's speech tomorrow.

Goldman Sachs economist Jan Hatzius doesn't expect Powell to signal a definitive rate cut, although he could make it clear that he supports one.

"We expect Powell to modify his statement from the July FOMC press conference that the FOMC is "well positioned" to wait for more information," Hatzius said. "Instead, he might note that the FOMC is well positioned to address risks to both sides of its mandate but emphasize that downside risks to the labor market have grown following the July employment report, while reiterating that tariffs are likely to have only a one-time effect on the price level. We do not expect him to decisively signal a September cut, but the speech should make it clear to markets that he is likely to support one."

Powell speaks at 10 AM ET on Friday, August 22.

Source: Investing.com