September Fed rate hike fears look overblown as the probability stands at just 58%, not 90%

Fear is in the air this Monday morning, not just over renewed escalation in geopolitical tensions, but over the prospect of an interest rate hike by the Federal Reserve in September, following Fed Chair Kevin Warsh's hawkish comments at the Jackson Hole Symposium on Friday.

But those fears, at least as reflected on social media, appear overblown looking at how the CME's Fed funds futures are actually pricing the possibility. For Bitcoin and Gold, this means scope for continued ascent following August’s 23% and 10% gains.

As of this writing, the probability of a rate hike stood at 58%, a long way from the 90%-or-higher reading that typically qualifies as a done deal, according to the CME’s FedWatch tool. The threshold above which the Fed tends to validate market expectations rather than surprise them, besides, sits somewhere between 60% and 70%.

"The next Fed meeting is a lean hike not a done deal," Jim Bianco, founder of Bianco Research, said on X.

On Friday, Warsh said inflation data "are more concerning" than trends in the labor market, adding that inflation is unlikely to return to target on its own. He pointed to PCE inflation, the Fed's preferred gauge, standing at 3.7%, calling that level concerning relative to the central bank's 2% target.

He also noted that over the past year, more than half of goods and services tracked by the government saw price increases of 3% or higher, well above the roughly one-third that saw comparable increases in the two decades before the pandemic. The remarks were quickly read as hawkish, or pro-rate-hike, sending social media abuzz with expectations of a 25-basis-point hike in September. The benchmark borrowing cost currently sits in a range of 3.5% to 3.75%.

BTC fell 3% to under $77,000 the same day, marking its first notable pullback following a steep rally from roughly $63,000 to over $80,000 earlier this month. Gold fell too, while the Dollar Index and Treasury yields both rose.

Bianco isn't alone in downplaying rate-hike fears. Firms including ABN AMRO Investment Solutions and Brandywine Global Investment Management are similarly skeptical.

Robin Brooks, senior fellow at the Brookings Institution and former chief economist at the IIF, said that a potential rate hike would be aimed at calming Treasury-market jitters rather than delivering outright policy tightening. Such a move could signal that the Fed remains credible on inflation, reducing the extra premium investors demand to hold long-dated bonds and thereby capping the rise in yields.

“A September hike - if it comes to pass - will happen to anchor the 10-year yield and avoid a repeat of the bond market sell-off after July 29. Its purpose will therefore be the opposite of what a traditional hike aims to do and is why the debasement trade will continue to do well,” Brooks explained in a blog post.

He added that it will be performative, with the principal aim of keeping financial conditions loose.

For Bitcoin and gold, it means that the path of least resistance remains on the higher side.