Markets have increased their expectations for a Federal Reserve rate hike in September following Kevin Warsh’s hawkish comments at Jackson Hole, but current pricing suggests the outcome is still far from certain.
CME FedWatch data put the probability of a September increase at 58%. That is below the 60%-70% range where a Fed move generally begins to look highly probable and well below the 90% threshold typically associated with a near-certain decision.
Jim Bianco, founder of Bianco Research, described the upcoming meeting as leaning toward a hike rather than guaranteeing one.
Warsh’s comments on Friday strengthened the hawkish case. He said inflation remains a bigger concern than the labor market and argued that price pressures are unlikely to return to the Fed’s 2% target without further action.
He highlighted PCE inflation at 3.7%, well above the central bank’s 2% objective. Warsh also noted that more than half of the goods and services tracked by government data recorded price increases of at least 3% over the past year, compared with roughly one-third during the two decades before the pandemic.
The remarks quickly prompted traders to increase bets on a 25-basis-point move in September. The federal funds target range currently stands at 3.5%-3.75%.
Bitcoin initially came under pressure following the speech, falling about 3% to below $77,000. The decline followed a sharp August rally that took BTC from around $63,000 to above $80,000. Gold also weakened, while the U.S. dollar and Treasury yields climbed.
Rate-Hike Concerns May Be Overstated
Some analysts and investment managers remain skeptical that a September increase would mark the beginning of a significant tightening cycle.
ABN AMRO Investment Solutions and Brandywine Global Investment Management have both taken a less aggressive view of the rate outlook.
Robin Brooks, a senior fellow at the Brookings Institution and former chief economist at the Institute of International Finance, said a potential rate hike could be intended primarily to stabilize the Treasury market rather than tighten financial conditions in the traditional sense.
Brooks argued that raising rates could reinforce the Fed’s inflation-fighting credibility and reduce the premium investors demand to hold longer-term Treasurys. That could help contain further increases in long-term yields.
He suggested a September hike, if delivered, could be designed to keep the 10-year Treasury yield anchored and prevent another bond-market sell-off like the one that followed July 29.
Under this scenario, the policy move would have a different purpose from a conventional rate increase. Instead of materially tightening financial conditions, it could be used to reassure bond investors and maintain stability in financial markets.
Bitcoin and Gold Could Still Have Room to Advance
With September hike odds currently at 58%, investors have not yet priced the decision as a foregone conclusion. If upcoming economic data fail to push those expectations significantly higher, bitcoin and gold could retain room for further gains.
Bitcoin is up about 23% in August, while gold has advanced roughly 10%. Their performance shows continued demand despite uncertainty surrounding U.S. monetary policy, Treasury yields and broader macroeconomic conditions.
The next major test will come from incoming inflation and employment data, which could determine whether the probability of a September rate increase moves firmly into the range where markets view a Fed hike as highly likely.
