WASHINGTON — Federal Reserve Governor Christopher Waller on Friday downplayed the immediate significance of August employment data, instead pinpointing the August Consumer Price Index report due next week as the critical input for the Fed's September decision.

Following Waller's remarks, bond markets repriced the September rate decision as a near coin flip. Futures are now pricing a 50 percent probability of a 25 basis point hike and a 50 percent probability of a pause—a sharp shift from earlier certainty about a cut.

Economists project a median gain of 56,000 non-farm jobs for August, a rebound from July's 23,000-job decline. The unemployment rate is expected to hold at 4.1 percent, though traders see upside risk to 4.2 percent. A miss on payrolls could tip the balance toward a pause; a beat would give the Fed cover for tightening.

But Waller's framing makes clear: employment data are secondary. The CPI and Producer Price Index readings next week will determine whether the Fed needs to hike to prove it is serious about disinflation, or whether it can pause without losing credibility.

The bond market's reaction was telling. Short-end Treasuries rallied hard on Waller's remarks. The curve bull-steepened—a move in which long-dated yields fall less than short-dated yields—signaling that duration buyers are positioning for a hike. In the current macro environment, a rate increase is seen as the Fed's tool to proactively defend against any re-acceleration in core inflation, which benefits long-bond investors by protecting real returns.

Waller also noted that global bond yields are rising, a signal that inflation pressures remain live outside the U.S. and that central banks worldwide may need to hold rates higher for longer.

In currency markets, the Japanese yen surged 2.5 percent this week to 156 per dollar, prompting speculation about possible intervention by Tokyo authorities. Traders are now pricing a 75 percent probability of a Bank of Japan rate hike this month, with 30 basis points of tightening expected by October. The move could be a single 25 basis point increase or two consecutive moves—a rare occurrence.

Brent crude held near six-week highs, up 7 percent this week to $95.52 a barrel.

Asian equities gained on the repricing. The Nikkei 225 climbed 1.1 percent, South Korea's KOSPI advanced 1.3 percent, and Hong Kong's Hang Seng jumped 2.1 percent. Wall Street and European futures were flat.