Fed Hike Speculation Cools as September Odds Stay Near 58%

The market has raised its expectations for a Federal Reserve rate hike in September following Kevin Warsh’s hawkish remarks at Jackson Hole. Even so, traders are not yet treating a policy increase as a done deal.

CME FedWatch data currently show a 58% chance of a September hike. That figure remains below the 60%-70% range where a rate move is generally considered highly likely and is well below the 90% level typically associated with an almost certain decision.

Jim Bianco, founder of Bianco Research, said the next meeting currently favors a hike but does not guarantee one.

Warsh’s Friday speech put the focus on persistent inflation. He argued that inflation remains more troubling than labor-market conditions and said price pressures are unlikely to return to the Federal Reserve’s 2% target without further progress.

He pointed to PCE inflation at 3.7%, significantly above the Fed’s target. Warsh also highlighted the broad nature of price increases, noting that more than half of the goods and services tracked by government data had recorded price gains of at least 3% over the past year, compared with roughly one-third during the two decades before the pandemic.

The comments fueled expectations for a potential 25-basis-point increase in September. The federal funds target range is currently 3.5% to 3.75%.

Bitcoin fell about 3% following the remarks, briefly dropping below $77,000 after rallying from approximately $63,000 to above $80,000 earlier in August. Gold also moved lower, while the dollar and Treasury yields strengthened.

Investors Remain Unconvinced

Several market participants are questioning whether a September rate increase would necessarily represent the start of a sustained tightening cycle.

ABN AMRO Investment Solutions and Brandywine Global Investment Management are among the firms taking a more cautious approach to the rate-hike outlook.

Robin Brooks, a senior fellow at the Brookings Institution and former chief economist at the Institute of International Finance, suggested that a possible hike could be aimed at stabilizing the Treasury market rather than aggressively tightening monetary policy.

Brooks argued that a rate increase could strengthen the Fed’s credibility on inflation and reduce the extra compensation investors demand for owning longer-term bonds. Lower risk premiums could, in turn, help prevent Treasury yields from rising too quickly.

He said a September hike could be used to keep the 10-year Treasury yield anchored and avoid another major bond-market sell-off.

Under that interpretation, the move would serve a different purpose from a traditional tightening measure. Instead of deliberately making financial conditions more restrictive, the Fed could use the hike to reassure investors and maintain market stability.

BTC and Gold Could Retain Momentum

With the September hike probability at 58%, markets have not fully priced in a policy increase. If incoming economic data fail to push those odds substantially higher, bitcoin and gold could maintain their recent strength.

Bitcoin has gained around 23% in August, while gold is up about 10%. Both assets have advanced despite rising Treasury yields and renewed uncertainty over the Fed’s policy path.

The next major catalyst will be upcoming U.S. economic data, particularly inflation and employment figures. Strong data could strengthen the case for a September hike, while weaker readings could reduce tightening expectations and provide further support for bitcoin and gold.