Fed: Why the panic around a hike in September seems excessive

The Fed could raise rates in September. The scenario is already worrying Bitcoin, gold and the bond markets since Kevin Warsh’s firm speech at Jackson Hole. However, Fed Funds contracts still only give a 58% probability of an increase. We remain far from the 90% generally associated with a practically certain decision.

The Fed remains far from an increase already achieved

The change in atmosphere was rapid. By mid-August, the probability of a Fed rate hike had fallen from 60% to 32%. Jackson Hole got everything moving again. Kevin Warsh devoted a large part of his August 28 speech to inflation. For the President of the Fed, the data remains worrying and a spontaneous return to the 2% objective seems unlikely.

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

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

Even the zone between 60% and 70% often plays an important role: beyond that, the Fed tends more to confirm expectations rather than wrong-footing investors. The market really isn’t there yet.

Inflation still gives Warsh arguments

The Fed’s caution does not come out of nowhere. The PCE index, a measure favored by the American central bank, shows inflation of 3.7%.

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

His speech was therefore logically interpreted as favorable to a firmer monetary policy. Bitcoin felt it quickly. After rising from around 63,000 to more than 80,000 dollars during the month, BTC lost almost 3% and fell back below 77,000 dollars.

Gold also fell. The dollar and bond yields have moved in the opposite direction. We already noted after Jackson Hole that Bitcoin had failed to hold on to $80,000 under the pressure of the Fed’s speech. So investors took Warsh seriously. Maybe a little too quickly.

A Fed hike would not necessarily mean a long tightening

Several analysts remain skeptical about the idea of ​​a new aggressive cycle of rate hikes. Jim Bianco summarizes the situation with a slightly favored upside scenario, not with a decision already locked in.

ABN AMRO Investment Solutions and Brandywine Global also show reservations. Another reading is circulating in the bond market. The Fed could raise its rates by 25 basis points mainly to show that it is keeping inflation under control. Such a move would strengthen its credibility and could ease tensions on long-term US bonds.

Robin Brooks, former chief economist at the Institute of International Finance, believes that an increase could precisely serve to limit the increase in ten-year yields.

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 center of the Fed’s concerns.

The next American data will therefore count a lot. The jobs report due this week comes first. Strong job creation and new pressures on prices would give the Fed more room. Low numbers would complicate the matter. For now, the market is simply saying this: 58% for an increase. 42% to avoid it. This is not a 90% certainty.