On the eve of the Fed restarting rate hikes, the market is still betting on Warsh "dovish"

Original ｜Odaily（@OdailyChina）

Author｜Golem（@web3_golem）

The Federal Reserve will announce its interest rate decision on September 16 (US Eastern Time), which is 2:00 AM Beijing Time on September 17. According to data released by the US Bureau of Labor Statistics last week, US core CPI rose 0.3% month-over-month in August, higher than economists' expectations of 0.2%. The market widely expects the Fed to announce a 25 basis point rate hike at this meeting.

As of press time, the probability on Polymarket of "the Fed hiking rates by 25 basis points in September" has risen to 88%. According to CME FedWatch, the probability of the Fed cumulatively hiking rates by 25 basis points by September has also reached 92.3%. With such a high probability, if the Fed announces no rate hike this time, it would instead come as a surprise.

"One Rate Hike" or the Start of a New Rate Hike Cycle?

The Fed's most recent rate hike was announced on July 26, 2023. All five FOMC meetings held in 2026 have announced keeping rates at 3.50%–3.75%. If a rate hike is announced in September, it would not only be the first rate hike this year, but also the first in three years.

The main reason for this rate hike is still fighting inflation, but what the market worries about is that a single 25 basis point hike alone will hardly bring inflation down. Fed Governor Christopher Waller previously said that whether the Fed hikes by 25 basis points this time or next time, there is actually no difference, because neither is enough on its own to bring inflation down to 2%.

Therefore, investors' focus is no longer on whether the Fed will hike rates this time, but on whether this marks the beginning of a new rate hike cycle.

The market generally leans toward the latter. Former Fed Vice Chair and current Pimco advisor Richard Clarida believes that if the Fed hikes this week, "there will certainly be more to come." Institutions generally predict at least three cumulative rate hikes by June next year. JPMorgan and HSBC both expect the Fed to hike by 25 basis points each in September and December 2026, whereas they had previously forecast either one hike in December or rates remaining unchanged. TD Securities analysts expect the Fed to launch the first of three rate hikes in this cycle in September, while they had previously predicted the central bank would stay put for the remainder of 2026.

According to a Reuters survey, most economists now believe the Fed will raise rates this week and hike at least once more before the end of March next year. This reverses the previously widespread and fragile consensus on keeping rates unchanged, and the mainstream view of rate cuts in 2027 no longer exists.

From historical experience, as former Fed senior advisor Kurt Lewis said: "Once the Fed makes the decision to tighten, it will keep hiking until it feels it has meaningfully changed the level of restrictiveness." Since the Fed established the federal funds rate as its primary tool for adjusting borrowing costs in the 1990s, it has treated a single hike as a "one-off" action only once, in 1997. Other historical rate hike actions have never existed in isolation.

Of course, a "one-and-done" rate hike is not impossible. Some argue that if Warsh supports a hike this time, it may be more about credibility considerations.

Since taking office as Fed Chair, Warsh has consistently faced questions about his independence, because the biggest reason Trump promoted Warsh was his belief that Warsh could help him lower interest rates. Therefore, this rate hike may be Warsh's "delaying tactic" to dispel external doubts about his policy independence and safeguard the Fed's credibility. Perhaps at the next FOMC meeting, Warsh will change his stance again.

From the perspective of market sentiment, since a September rate hike is almost a foregone conclusion, the market should have already priced in the expectation of a 25 basis point hike this week. According to market data, Bitcoin briefly fell below $76,000 on the day the CPI data was released, and spot Bitcoin ETFs saw net outflows of $463 million last week.

But this does not mean the market will not continue to fluctuate afterward because of this rate decision. How the market reacts at that time will basically depend on Warsh's remarks at the press conference.

After the Rate Decision Is Announced, Is There Still a Chance for a Market Rebound?

What investors are now focusing on for the September 16 FOMC meeting is the wording on rate hikes and signals about the future rate path.

As mentioned above, because of uncertainty around Warsh's stance, many investors are looking forward to Warsh's remarks at the press conference after the September 16 FOMC meeting. Jefferies global economist Mohit Kumar said that if the Fed hikes this week, Warsh's comments will be key. Kumar said: "From a credibility standpoint, the first hike may be necessary, but subsequent hikes will depend on how long the war lasts and where oil prices go."

One scenario is that Warsh continues the hawkish anti-inflation rhetoric he delivered last month at the Jackson Hole symposium; another scenario is that Warsh appears dovish, hinting that this hike is not the start of a new rate hike cycle, or that there will only be a few more hikes afterward.

In the first scenario, the market may continue to decline; if the second scenario occurs, the market may even stage a counterintuitive script and rebound against the trend. According to traditional logic, rate hikes are not good news for either stocks or crypto markets, but this time, because of the variable that is Warsh, some investors are already making bold bets in the market on Warsh making dovish remarks.

Bank of America Securities rate strategist Mark Cabana believes that if Warsh adopts a dovish tone, it could confuse investors and push long-term US Treasury yields higher again. He expects that at that time, 2-year yields could fall by 5 basis points, while 30-year yields could rise by 5 basis points. Amundi, the European asset management giant with $2.8 trillion in assets, has already been buying 2-year US Treasuries against the trend. Nicolas Dahan, the firm's senior portfolio manager for global bonds and currencies, believes that once the 2-year US Treasury yield stands above 4.50%, its value as a safe-haven hedging tool becomes prominent.

On Monday, the 10-year US Treasury yield touched 5% for the first time since 2023 and currently remains at 4.98%–5%. The deteriorating inflation outlook and the resulting upward pressure on long-term bond yields have instead become a greater source of risk for the current market. Therefore, these investors hope the Fed can suppress price pressures through one or two rate hikes while also avoiding a continued sharp rise in long-term bond yields.

Investors expect the crypto market to react in sync with the stock market. Matt Mena, senior crypto research strategist at 21Shares, said that based on historical data, Bitcoin has risen by an average of 2.13% within 30 days after core CPI comes in above expectations.

Crypto whale "First Set 10 Big Targets" still said after the release of US CPI data that Bitcoin's bullish trend remains unchanged. He previously also said that this round of trend will be more intense than originally imagined, and that it is not too late to get on board even at $80,000 or above $80,000, as there is still room.

Which script reality will follow remains to be seen when Warsh speaks in the early hours of September 17.