The Fed decides today, the markets are betting 92% on a rate hike

A few hours before the decision, the market has already almost checked the “rise” box. Contracts tracked by CME FedWatch give a 92.3% chance of a 25 basis point hike. The FED would therefore surprise more by not moving. However, the evening is not limited to this quarter point. Investors want to see the projections, count the dissenting voices and listen to Kevin Warsh. Stock markets, gold and bitcoin especially need to know what could come next.

Warsh moves from speech to rates

Let’s go back a month. Before Jackson Hole, the probability of an increase was around 36%. Kevin Warsh explained that inflation had not “improved sufficiently”. A few statistics later, the doubt has almost evaporated.

The Road to September tells the story of change better than any formula. In June, the FED left its range at 3.50%-3.75%. Same decision in July, this time with three members in favor of an increase of 25 basis points. The disagreement therefore existed before the markets massively lined up behind the scenario of an increase.

This Wednesday, a range of 3.75%-4.00% constitutes the dominant scenario. At 8 p.m. in Paris the press release, economic projections and the dot plot will be released. Warsh will speak thirty minutes later.

This is where screens will become interesting again. A widely anticipated increase provides information about today; the points of the dot plot speak of tomorrow. A further rise in December would change the reading. A calmer trajectory too. After weeks of watching the same number climb, traders will finally be able to look elsewhere.

Inflation, oil, employment: the rise is coming on what grounds?

Prices provide a good part of the answer. In August, US inflation increased by 0.4% over one month and 3.4% over one year. Excluding food and energy, it advances by 0.3% monthly. The FED target remains set at 2%.

Then there is energy. Crude has returned to $100 in the sources studied, against a backdrop of disruptions around the Strait of Hormuz. When oil rises in price, transport, production and household budgets end up feeling it.

Employment offers little respite to those in favor of a break. The United States created 162,000 jobs in August and unemployment stood at 4.1%. Meanwhile, the ten-year Treasury is moving around 5%.

The central bank therefore lands on an awkward economy: inflation too high, employment resistant, long-term rates already tight. Raising rates can weigh on credit. Doing nothing, with markets almost certain to the contrary, would cause another jolt. The decor is enough; no need to add lightning to it.

What if Wall Street digested the increase rather well?

On Tuesday, stocks had little desire to celebrate. Oil had gained further ground and investors were reducing their exposure to several consumer-related sectors. However, a rise in rates does not automatically condemn Wall Street to a bad session.

The reason lies in bonds. If the FED convinces investors that it is regaining control over inflation, the pressure on long-term yields could calm down. Scott Ladner, chief investment officer at Horizon, describes this unusual configuration :

It is the signaling effect and the net impact on the long end of the curve that could ultimately benefit equity markets.

The story remains less cheerful. Canaccord Genuity examined six beginnings of tightening cycles over more than thirty years: the S&P 500 lost 3.4% on average during the following month. An average does not write Wednesday’s session. It only reminds us why investors look at stocks, the dollar and Treasuries at the same time.

This time, the quarter point has already traveled a lot in prices.

Gold waits below $4,350, without choosing sides

Gold advances with two headwinds. As of Wednesday morning, the yellow metal remains below $4,350 per ounce. The dollar gave up some ground after hitting a two-week high, providing support. High bond yields tell the opposite story.

When bonds pay more, holding an asset without yield becomes relatively less attractive. The FED can increase this pressure if its projections draw several additional increases. But gold retains another clientele: those who seek refuge when geopolitical or economic tensions rise.

The technical levels provide some benchmarks. FXStreet located a first resistance towards $4,413, then a stronger area around $4,520. On the downside, $4,326 serves as initial support, ahead of the 50-day moving average near $4,280.

Even an increase of 25 basis points can therefore produce different reactions depending on the speech that accompanies it. For traders, there is no point in guessing too early. Metal waits for the release, then Warsh. He also wants to know what happens next.

Bitcoin at $75,800: is 70,000 becoming the next test?

Bitcoin arrives with a few bruises. Its price fell below $76,000, the lowest since August 21. On Tuesday, more than $545 million in long positions were liquidated. Spot ETFs saw $462.73 million in outflows last week, following $3.52 billion inflows in August.

Added to this nervousness is Washington. The Senate did not advance the CLARITY Act on September 15: 49 votes to 50, when 60 were needed. The crypto market thus loses a regulatory meeting followed by investors.

Bill Merz, of US Bank Asset Management, invites us to distinguish expected and surprise decision :

We probably shouldn’t expect a large and immediate impact from a rate hike on stocks, since it is already priced in.

For bitcoin, the figure that comes up is $70,000. This area joins old prices and the 200-day moving average. A close below, with persistent ETF outflows, would give sellers more room. Not a prophecy: simply the next place where buyers and sellers could meet in numbers.

Five figures before the meeting

• The price of BTC at the time of writing is $75,867, after falling below $76,000.
• CME FedWatch puts the probability of a 25 basis point hike at this meeting at 92.3%.
• US inflation reached 3.4% year-on-year in August, while its underlying component increased by 0.3% month-on-month.
• The American economy created 162,000 jobs in August and the unemployment rate stood at 4.1%.
• The yield on the ten-year Treasury is around 5%, a level which is already weighing on financial conditions.

At $75,860, bitcoin still has a margin before the 70,000 zone mentioned by technical analysts. This evening, the first movement could come from the FED press release; the rest will perhaps depend more on the projections and Warsh. If the FED plans further increases, risky assets will have to absorb the message. If the tone turns out to be less harsh, bitcoin could find some air again. The market will revise its certainties in a few minutes.