Global markets opened the week under pressure on Monday as geopolitical tensions intensified and Federal Reserve Chair Kevin Warsh struck a hawkish tone at the Jackson Hole gathering of central bankers, reigniting fears that the Fed could resume rate hikes in September.
Still, pricing in federal funds futures suggests the market has not fully locked in that outcome. For Bitcoin and gold, which gained 23% and 10% in August, respectively, the rally may not be over yet.
CME FedWatch shows 58% odds of a September hike
According to CME FedWatch data, the market was pricing in only a 58% probability of a September rate hike at the time of writing. That is well below the 90%+ level often seen as a near-certain outcome, and it also sits under the 60% to 70% range often viewed as the point where the Fed can move without catching markets off guard.
Jim Bianco, founder of independent research firm Bianco Research, wrote on X: "The Fed’s next policy meeting is leaning toward a hike, but it is not a done deal."
Warsh points to inflation, with PCE still at 3.7%
Warsh said inflation data was "more concerning" than labor-market trends and argued that inflation was unlikely to fall back to target on its own. He singled out the personal consumption expenditures price index, the Fed’s preferred inflation gauge, which is currently running at 3.7% year over year, against the central bank’s 2% target.
He added that over the past year, more than half of the goods and services tracked by the government posted price increases of 3% or more. Before the pandemic, that share had been only about one-third over a 20-year period. Markets quickly read the remarks as a strong hawkish signal, fueling discussion of a 25-basis-point hike in September. The U.S. benchmark rate is currently in a 3.5% to 3.75% range.
Bitcoin drops below $77,000 as gold also weakens
After the remarks, Bitcoin fell 3% on the day and dropped below $77,000, marking its first clear pullback after climbing from $63,000 to $80,000 this month. Gold also moved lower, while the dollar index and U.S. Treasury yields rose together.
Several institutions question the scale of the hike threat
Jim Bianco is not alone in pushing back on the rate-hike scare. Institutions including ABN AMRO Investment Solutions and Brandywine Global have taken a similar view.
Robin Brooks says a hike could be aimed at calming the bond market
Robin Brooks, a senior fellow at the Brookings Institution and former chief economist at the Institute of International Finance, said that even if the Fed does raise rates in September, the goal may be to soothe nerves in the U.S. Treasury market rather than impose meaningful monetary tightening.
In his view, such a move would signal that the Fed still has anti-inflation credibility. That, in turn, could lower the risk premium investors demand to hold long-dated Treasuries and help restrain a surge in long-end yields.
Brooks said: "If the Fed does hike in September, the main purpose would be to anchor the 10-year Treasury yield and avoid a repeat of the bond-market selloff seen after July 29."
He argued that the practical intent of such a hike would be the opposite of traditional tightening. That is why the "debasement trade" should continue to strengthen, he said, referring to investor demand for scarce assets such as gold and Bitcoin as a hedge against currency debasement and growing money supply risks.
Brooks added that the move would be more performative in nature, with the real objective still centered on keeping overall financial conditions loose. Under that view, the path of least resistance for Bitcoin and gold remains higher.