Markets Still Doubt a Fed Hike Despite Strong Jobs Data

Bitcoin moved lower Friday and Treasury yields rose following the release of stronger-than-expected U.S. employment data. Even so, the market’s hawkish reaction appears somewhat out of proportion to the limited change in expectations for Federal Reserve policy.

The latest jobs figures have given fresh support to the argument for a rate increase at the Fed’s September meeting. But interest-rate markets are not pricing in a dramatic shift toward tighter policy.

Traders currently see a 58% probability of a 25-basis-point increase, according to the CME FedWatch Tool. Such a move would bring the Fed’s benchmark rate to a 3.75%-4% range.

Importantly, that probability remains close to where it stood a week ago, following Fed Chief Kevin Warsh’s hawkish speech at Jackson Hole. Despite Friday’s employment numbers, investors with direct exposure to interest-rate markets have not meaningfully increased their bets on a hike.

That leaves a notable gap between the increasingly hawkish commentary from analysts and social media and the more restrained positioning in financial markets.

The initial reaction to the jobs report was considerably more pronounced. Bitcoin dropped from roughly $81,300 to $78,700 within a few hours, while the two-year Treasury yield increased from 4.36% to 4.42%.

The two-year Treasury is particularly sensitive to changes in expectations for Fed policy, making its move a clear sign of the market’s immediate response. However, the relatively steady rate-hike probability indicates that the reaction may have overstated the impact of the employment data.

For now, a September rate increase remains a possibility rather than a settled outcome. The Fed’s outlook could shift again when the latest inflation figures arrive on Sept. 11, particularly if the data falls short of expectations.

The debate is also complicated by elevated oil prices. Some analysts believe raising rates during an oil shock could put additional strain on the economy and ultimately do more harm than good.

The Federal Reserve is scheduled to announce its September policy decision on Sept. 16.