Fed: Probability of September rate hike drops from 60% to 32%

The prospect of monetary tightening in September is fading in the United States. The latest data on inflation and consumption have reassured markets and reduced expectations of a rate hike by the Federal Reserve. This change in scenario offers respite to risky assets, including cryptos. However, caution remains in order, because American debt and geopolitical tensions could still weigh on the Fed’s next decisions and on the trajectory of the markets.

The temptation of a monetary pause from the Fed in the face of the unexpected lull in prices in the United States

This week, financial markets witnessed a radical shift in expectations regarding the Fed’s monetary policy. According to data from the CME FedWatch toolthe probability of seeing the institution tighten its grip by increasing its rates by a quarter of a point in September has collapsed, falling to just over 32% against around 60% just a week earlier, leaving only a third of analysts on this scenario.

This change of direction is explained by the publication of particularly reassuring macroeconomic data. The producer price index (PPI) was perfectly stable for the month of July. John Plassard, head of investment strategy at Cité Gestion, underlined this surprise by recalling that “the market expected an increase of 0.2%”. This figure validated the data observed the day before on the consumer price index (CPI), which already showed a slowdown in the rise in retail prices. Andreas Lipkow, analyst at CMC Markets, summarized the situation by saying that these publications “did not reveal inflationary dynamics”.

Beyond the price trajectory, the American consumer is also showing signs of calm, eliminating the argument of a domestic market under tension. The Commerce Department revealed Friday that retail sales stood at $763.6 billion in July, down 0.6% from the previous month, confirming a slowdown following a sharp decline noted in June. Faced with these signals of moderation, the specialists’ diagnosis has become clearer.

Like the summary John Plassard, “Inflation remains too high, but it does not justify, at this stage, an immediate further tightening”. Thus, this lull immediately benefited stock indices, propelling stocks close to their peaks. At the opening of Wall Street, the S&P 500 rose 0.05% to 7,803 points while the Nasdaq gained 0.15% to 26,850 points. Daniela Hathorn, analyst for Capital.com, confirmed this positive development by stating: “Markets end the week with US stocks near all-time highs, after inflation data reduced concerns that the Federal Reserve will tighten monetary policy again in September”.

All of these consistent statistics can be summarized through the following three key indicators:

• The stability of the PPI index: zero variation (0.0%) recorded in July compared to an increase of 0.2% anticipated by the market consensus;
• The decline in consumption: retail sales reduced to $763.6 billion, a marked contraction of 0.6% over one month;
• The collapse of expectations: the probability of a rate hike in September falling from 60% to 32% according to CME FedWatch.

The growing public debt burden and Washington’s strategic dilemma

If the temptation for a prolonged pause is gaining ground within the central bank, it is also because the Federal Reserve is operating in the middle of a major budgetary headache for the American state. Maintaining high interest rates weighs heavily on public finances and on Washington’s borrowing costs, which influences the monetary institution’s room for maneuver under the presidency of Kevin Warsh. Ipek Ozkardeskaya, analyst at Swissquote, reveals this structural constraint by explaining that the Fed could favor lower rates “in the hope of alleviating the growing burden of interest payments on an exploding American debt, at the very moment when the crisis of confidence in the American government (…) is exerting pressure” on long-term returns.

This parameter is crucial for the behavior of portfolio managers and for the crypto ecosystem. Key rates maintained at high levels have the effect of increasing the financial burden on indebted companies while diverting available liquidity towards the bond market, whose attractive returns directly compete with riskier investments. Conversely, any prospect of monetary easing breathes new life into investment capital in search of alternative returns. The trajectory of the American debt thus constitutes a powerful vector of incentive for the Fed.

Geopolitical tensions and the threat of a rebound in energy prices

However, the risk of an inflationary resurgence has not been completely ruled out and is now based on a particularly explosive international environment. The diplomatic firmness displayed by the American administration rekindles fears of a secondary oil shock, following American strikes in Iran. On Thursday, US Treasury Secretary Scott Bessent toughened his tone by threatening Tehran with economic isolation “like the world has never seen”shattering the hope of a rapid agreement promised at the beginning of August for the reopening of the Strait of Hormuz, the nerve center of global hydrocarbon trade.

On the maritime terrain, passage restrictions persist and the resurgence of tensions has materialized in attacks targeting ships linked to the United Arab Emirates. Daniela Hathorn summarizes the direct impact of this geopolitical turbulence on market morale by noting that “This situation forced traders to re-enter some of the geopolitical risk premium that had been removed from prices earlier in August”.

Ultimately, the macroeconomic balance has softened for investors. The stability of the PPI, the decline in the CPI and the contraction in retail sales (-0.6%) remove the urgency of a rate increase in September. However, the equation remains extremely complex. If the easing of key rates provides favorable ground for global liquidity and the crypto market, geopolitical risks and the burden of sovereign debt impose legitimate restraint.