September Fed rate hike fears appear overblown
The probability of a September rate hike stands at around 58%, while market observers warn that the reaction to Warsh may have gone too far.
Key takeaways
- Markets put the probability of a U.S. rate hike in September at around 58%.
- The probability rose quickly after Fed Chair Kevin Warsh's hawkish speech in Jackson Hole.
- Market observers such as Mohamed El-Erian believe current rate expectations may still be too aggressive.
Fears of a Federal Reserve rate hike in September appear greater than current market data justify. Following Fed Chair Kevin Warsh's hawkish speech in Jackson Hole, the estimated probability of a rate hike rose quickly, but still stands at around 58%. A hike has therefore become more likely, but is far from certain.
Markets react strongly to Warsh
Warsh placed strong emphasis on inflation during his speech and warned that price pressures are not yet sufficiently under control. That message almost immediately triggered a repricing in interest-rate markets.
The yield on two-year U.S. Treasury notes rose after his comments, while markets increased the probability of a September rate hike from around 35% to roughly 60%. Bitcoin fell below $78,000 during the initial reaction, while several crypto-related stocks also came under pressure.
Still, a probability of 58% does not mean markets are almost certain that rates will rise. Current pricing instead shows that investors remain sharply divided over the outcome of the Fed's September meeting.
El-Erian says expectations are too high
Mohamed El-Erian, former chief executive of bond manager Pimco, questioned the rapid shift in rate expectations. According to him, even a probability of around 60% may be too high.
His caution is particularly relevant because several important economic reports are still due before the next Fed meeting. New inflation and labor-market data could change expectations again before policymakers make their decision.
That makes current market pricing largely a snapshot. A hawkish speech can quickly shift expectations, but the final rate decision will depend on several economic indicators that have yet to be published.
Bitcoin remains sensitive to rate expectations
Federal Reserve expectations remain important for Bitcoin because higher interest rates are generally less favorable for riskier assets. When the probability of a rate hike increased on Friday, Bitcoin fell below $78,000 during the session. BTC later recovered part of those losses.
At the same time, current market pricing shows that uncertainty remains high. A probability of 58% means a rate hike is considered slightly more likely than unchanged policy, but both scenarios remain realistic.
For the crypto market, upcoming U.S. inflation and labor-market data could therefore be at least as important as Warsh's speech itself. New data could once again cause a significant shift in rate expectations before the Fed meets in September.
