Bitcoin Rattled by Fed Hike Talk as September Odds Reach Just 58%

The Fed could raise its rates in September. The scenario is already worrying Bitcoin, gold, and bond markets since Kevin Warsh’s firm speech at Jackson Hole. However, Fed Funds contracts still assign only a 58% probability to a hike. This is far from the 90% generally associated with an almost certain decision.

The Fed Is Far from a Confirmed Hike

The change in mood was quick. Mid-August, the probability of a Fed rate hike had fallen from 60% to 32%. Jackson Hole reset everything. Kevin Warsh dedicated much of his August 28 speech to inflation. For the Fed chairman, the data remain worrying and a spontaneous return to the 2% target seems unlikely.

The markets reacted immediately. Expectations for a hike at the September 16 meeting have risen around 58%. This places a rate increase ahead of the status quo scenario.

Not far ahead though. CoinDesk reminds that a probability close to 90% or more generally corresponds to a decision the market considers almost certain. 58% still leaves plenty of room for a surprise.

Even the range between 60% and 70% often plays an important role: above that, the Fed tends more to confirm expectations rather than catch investors off guard. The market is not quite there yet.

Inflation Still Gives Warsh Some Arguments

The Fed’s caution does not come out of nowhere. The PCE index, the preferred measure by the U.S. central bank, shows inflation at 3.7%.

Official target: 2%. Warsh also noted that more than half of the goods and services tracked by the government had recorded price increases of at least 3% over the past year. Before the pandemic, this proportion was around one-third.

His speech was therefore logically interpreted as favorable to a firmer monetary policy. Bitcoin felt it quickly. After trading up from about $63,000 to over $80,000 during the month, BTC lost nearly 3% and fell back below $77,000.

Gold also declined. The dollar and bond yields went the opposite way. It was already observed after Jackson Hole that Bitcoin failed to hold $80,000 under Fed speech pressure. Investors therefore took Warsh seriously. Perhaps a bit too quickly.

A Fed Hike Would Not Necessarily Mean a Long Tightening

Several analysts remain skeptical about the idea of a new aggressive rate hike cycle. Jim Bianco sums up the situation with a slightly favored hike scenario, not a locked-in decision.

ABN AMRO Investment Solutions and Brandywine Global also express reservations. Another view circulates in the bond market. The Fed could raise rates by 25 basis points mainly to show it maintains control over inflation. Such a decision would strengthen its credibility and could ease tensions on long-term U.S. bonds.

Robin Brooks, former chief economist at the Institute of International Finance, believes a hike could precisely serve to limit the rise of the 10-year yield.

This would be quite different from a long campaign intended to break demand. Warsh’s speech, however, remains firm. His first major intervention at Jackson Hole confirmed that inflation remains at the heart of the Fed’s concerns.

The upcoming U.S. data will therefore matter a lot. The employment report expected this week is front and center. Strong job creation and new price pressures would give the Fed more leeway. Weak figures would complicate matters. For now, the market simply says this: 58% for a hike. 42% to avoid it. This is not a 90% certainty.