Summary
- The CME's FedWatch tool indicates a 94.5% likelihood of a 25-basis-point rate hike on Wednesday, raising the federal funds rate to 3.75%-4% from 3.50%-3.75%.
- A recent Wall Street Journal survey reveals that nearly all major banks expect the rate hike in September, with most predicting a total tightening of 50 basis points by 2026, while Bank of America, Deutsche Bank, and RBC forecast 75 basis points.
- This situation creates a political challenge for Fed Chair Kevin Warsh, who was appointed by President Trump, who has been advocating for lower rates.
Wall Street is preparing for the Federal Reserve to undertake its first interest rate hike since 2023.
The Federal Open Market Committee will conclude its two-day meeting on Wednesday, and the CME's FedWatch tool now shows a 94.5% chance of a quarter-point increase, a significant rise from below 50% just a month ago.
Myriad: Will the Fed raise interest rates? Click to make your prediction.This rapid shift from uncertainty to near consensus was highlighted in a Wall Street Journal survey published recently, which indicated that almost every major bank now anticipates a hike this week. Most banks, including Barclays, Citigroup, JPMorgan, Morgan Stanley, and UBS, project a total tightening of 50 basis points by the end of the year.
In contrast, Bank of America, Deutsche Bank, and RBC are taking a more aggressive stance, predicting 75 basis points of tightening this year. Goldman Sachs is on the more cautious side, expecting only this week's quarter-point increase. Meanwhile, Jefferies and Oxford Economics are outliers, anticipating rate cuts in December and 2027, respectively.
Rising rates increase borrowing costs, which can dampen spending and negatively impact assets that thrive on lower investment costs, such as stocks and Bitcoin. Additionally, higher rates make safe government bonds more appealing, leading to a shift away from riskier investments. However, the main concern isn't just the hike itself, but the uncertainty surrounding future increases, which often unsettles markets, prompting a preemptive repricing.
Rationale Behind the Fed's Decision
The rationale for a rate hike is the persistent inflation that remains stubbornly high. In August, the headline Consumer Price Index (CPI) was at 3.4% annually, with core inflation at 2.5%, both exceeding the Fed's 2% target. The increase in oil prices, exacerbated by ongoing tensions with Iran, has added additional inflationary pressure that cannot be easily mitigated by tariffs or rate cuts.
The Fed maintained its rates at 3.50% to 3.75% during July, but that decision was made with a narrow 9-3 vote, indicating that three policymakers were already advocating for a hike at that time. This internal division, along with a stronger-than-expected jobs report in August, has swayed the committee toward tightening as they approach this week's meeting.
The impending hike places Fed Chair Kevin Warsh in a difficult position, as he was appointed by President Trump, who has been vocal about his desire for lower rates. At Warsh's swearing-in in May, Trump urged him to be "totally independent" while clearly indicating his preference for lower rates.
This expectation has not materialized—at least not in the way Trump envisioned that independence.
In the past two weeks, Trump, Vice President JD Vance, and Treasury Secretary Scott Bessent have all publicly advocated for rate cuts, with Trump even suggesting he might halt trade with countries running a surplus with the U.S. unless rates decrease. Warsh has stated that the president has not influenced the Fed's decisions.
The upcoming hike occurs just two months before the midterm elections in November, where surveys already show voter dissatisfaction with rising prices and borrowing costs, partly due to the tariff and Iran-related policies that Trump has supported.
Bond markets are already reacting ahead of Wednesday’s announcement. The 10-year Treasury yield reached 5.04% this week, marking its highest level since July 2007, as traders prepare for the hike and a prolonged period of elevated rates. The two-year yield, which is more responsive to Fed policy, has also hit a peak not seen since July 2024.
Higher yields enhance the attractiveness of Treasurys compared to riskier assets and generally strengthen the dollar, which poses challenges for cryptocurrencies that thrive in a low-interest environment.
Implications for Bitcoin and Altcoins
The cryptocurrency market is already on shaky ground. On Tuesday, Bitcoin traded at approximately $75,700, down about 3.2% after the failure of the long-anticipated Clarity Act in the Senate. Bitcoin has significantly declined from its September peak of nearly $82,000.
The critical support level for Bitcoin appears to be around $73,200; a daily close below this threshold could open the door to further declines, potentially down to $71,000 or even $66,900, based on technical indicators, which would negate the recent price surge that led to Bitcoin's current golden cross.
Bitcoin price data. Image: TradingviewHowever, not all market analysts view the rate hike as entirely negative. Some suggest that a quarter-point increase aimed primarily at stabilizing long-term Treasury yields, rather than tightening financial conditions, could keep the medium-term outlook for crypto relatively stable. In this perspective, the critical factor will be whether the Fed's statement and Warsh's tone during the press conference deviate from market expectations.
Higher-beta altcoins are likely to experience more significant price fluctuations than Bitcoin, given their lower liquidity and increased leverage.
The Fed's statement and updated dot plot are scheduled for release at 2 p.m. ET on Wednesday, followed by Warsh's press conference at 2:30 p.m. ET. Traders will be keenly observing whether officials project only one additional rate hike this year or align more closely with the two further increases anticipated by Bank of America, Deutsche Bank, and RBC.