Original | Odaily Planet Daily (@OdailyChina)
Author | jk
In the short span of the past week, market bets on a September rate hike have surged from less than 50% to over 80%.
Such speed in pricing changes is uncommon in the history of Fed watching over the past year, and Bitcoin and a host of crypto-related stocks have already begun to price in this possibility.
Last week, the Federal Reserve's July 29th policy meeting maintained the target range for the federal funds rate at 3.50% to 3.75% with a 9-3 vote, marking the fifth consecutive meeting of holding steady. However, unlike the almost certain decisions of previous meetings, this vote revealed a clear divergence. Cleveland Fed President Hammack, Minneapolis Fed President Kashkari, and Dallas Fed President Logan cast dissenting votes, advocating for an immediate 25 basis point hike, citing that inflation has been running above the 2% target for over five consecutive years. Fed Chair Wash, at the post-meeting press conference, used a vivid phrase, saying he "asked for a good family quarrel, and indeed got one."
This divergence directly pushed up market expectations for a September hike. According to data from the CME FedWatch Tool, just one week before this meeting, market pricing for a September hike was less than 53%. But within a short week, as rising oil prices fueled inflation concerns, this probability jumped to 82% at one point and is now reported at 73%. The 9-3 vote result represents a growing hawkish faction within the committee hoping for a hike, which the market widely interprets as a significant increase in the likelihood of a September rate increase.
Current probability of a rate hike. Source: CME
However, it's important to note that a clear gap remains between market pricing and the overall expectations of economists. A FactSet survey of economists shows that most still believe rate cuts will resume in 2027, with a cumulative reduction of around 50 basis points. In other words, the pricing in short-term interest rate futures more reflects a sensitive reaction to recent oil price and inflation data.
From a broader perspective, the resurgence of these rate hike expectations follows a relatively clear transmission chain, with the core starting point being geopolitical conflict near the Strait of Hormuz. Since July, escalating conflicts between Iran and relevant parties have repeatedly threatened this key waterway, about 30 miles wide, which handles roughly 20% of global daily seaborne oil trade. WTI crude oil futures rose approximately 20% in July. Note, this is not the first conflict but a second round of US-Iran conflict following an agreement. Energy prices are one of the most directly transmitted components in the Fed's key PCE inflation gauge. Rising oil prices quickly reflect in the next inflation report, which is the direct reason for the market's rapid repricing of hike probability in the past week.
Regarding specific data points, the June CPI report released on July 14 showed a year-on-year increase of 3.5%, the most optimistic reading since the Iran conflict erupted, primarily due to a temporary relief from a 5.7% month-on-month drop in energy prices during a ceasefire. However, this relief appears quite fragile, as July's renewed oil price increases are likely to be reflected in the next data release. The next widely recognized key node is the July CPI report released on August 12th. If the data shows the June moderation is real and sustainable, the probability of a September hike will likely revert towards the economist consensus. However, if the data indicates energy-driven inflation is reaccelerating, especially if the Iran ceasefire remains incomplete and oil prices stay above $80, the probability of a September hike will rise further.
Signals from the Fed itself are also reinforcing this expectation. The dot plot from the June meeting showed that 9 out of 18 officials now expect at least one rate hike this year, higher than in March when the median projection still anticipated rate cuts. The core PCE inflation forecast was raised to 3.3% for 2026. Since taking office, Chair Wash has explicitly simplified policy statements and downplayed forward guidance. He notably did not submit his own economic projections at the June meeting, but his press conference remarks were interpreted as hawkish by the market, directly fueling rate hike bets at the time. Some members hold differing views; for instance, Milan, who was on the committee earlier this year, publicly questioned the logic of hiking when core CPI monthly readings had once turned negative. Overall, besides developments in the geopolitical situation itself over the next month, the July CPI data, the August non-farm payrolls report, and Fed officials' remarks at the Jackson Hole Symposium will be key windows for judging whether a September hike truly materializes, which will also amplify volatility in crypto assets and related US stocks around these data release dates.
Impact on Crypto Assets?
For crypto assets, a rise in rate hike expectations is never good news. Bitcoin is currently oscillating between $64,000 and $65,000 and remains highly sensitive to Fed signals. Bitcoin has repeatedly demonstrated high-beta risk asset characteristics over the past year, with its price movements showing a strengthening correlation with the US dollar liquidity cycle. Since the beginning of the year, impacted by a series of macro shocks like tariff policies and geopolitical risks, Bitcoin once fell below $64,000, while traditional safe-haven assets like gold and silver recorded double-digit gains. This divergence itself indicates the market does not treat Bitcoin as a true safe haven but as a liquidity-sensitive risk asset. If the Fed does pivot to a hike in September, the opportunity cost of holding non-yielding assets like Bitcoin will rise further, and the incentive for funds to flow back from risk assets to money market funds and short-term bonds will correspondingly strengthen, directly putting pressure on short-term sentiment in the crypto market.
However, the impact of rate hikes on Bitcoin is not linear. Entering 2023, despite the Fed still hiking rates twice consecutively, Bitcoin rose 21% against the trend. The actual impact of the last two hikes on price was quite limited, indicating that when a rate hike path is fully digested by the market and inflation data shows marginal improvement, the hike itself may not necessarily continue to suppress prices. What truly determines the move is often the expected change in policy direction, not the single hike action. This historical experience also provides a reference for observing this potential September hike. If a September hike ultimately materializes but is interpreted by the market as the end of the tightening cycle rather than its start, Bitcoin's decline in magnitude and duration could be brief, with the market entering expectations for a rate-cutting cycle faster.
Impact on US Stocks?
Regarding US stocks, the price movements of crypto-related stocks and assets often amplify Bitcoin's own volatility. Stock prices of companies like Coinbase (COIN), Circle (CRCL), and MicroStrategy (MSTR) typically react to rate expectations more sharply than spot Bitcoin: rising rate hike expectations mean a higher risk-free rate, which directly increases the discount rate in equity valuation models, putting particular pressure on growth and high-valuation tech stocks. An important support for the US stock rally in recent years has been valuation expansion driven by rate cut expectations. Once this expectation reverses, the market needs to reprice for higher capital costs, making increased index volatility almost inevitable. Notably, several heavyweight tech stocks in the S&P 500 and Nasdaq have already experienced significant corrections. If expectations for a September hike further solidify, valuation pressure on these core heavyweight stocks could transmit to the broader index level.
Simultaneously, this rise in rate hike expectations coincides with the most capital-intensive earnings season for tech giants. From late July to early August, Google, Microsoft, Meta, Amazon, and Apple sequentially reported Q2 earnings, with market reactions showing clear divergence. The core point of contention is whether capital expenditures can translate into actual revenue. Google Cloud revenue surged 82% year-on-year to a record growth rate, but its full-year capital expenditure guidance was raised to a range of $195-205 billion, causing its stock price to drop 7%. Meta's revenue grew 28% year-on-year, slightly exceeding expectations, but its capital expenditure guidance was raised to $130-145 billion, sending its stock tumbling nearly 9%. Apple's stock fell significantly due to weaker-than-expected revenue guidance for Q4 and supply chain constraint concerns. Only Microsoft delivered results satisfying the market, with annual cloud revenue surpassing $100 billion for the first time and its FY2027 capital expenditure guidance lowered from $190 billion to $175 billion, causing its stock to surge over 15% in a single day, its biggest gain in nearly 18 years. The combined capital expenditure of these four companies approaches $750 billion, and the market's evaluation criteria have shifted from "willingness to spend on AI" to "whether this money can convert into visible revenue and cash flow."
This divergence implies higher sensitivity heading into September. These giants primarily rely on debt and equity issuance to fill cash flow gaps for their capital expenditures. If a September hike indeed occurs, rising corporate financing costs will directly compress the marginal return space for their capital spending. At that point, market tolerance for the narrative of "spending heavily on AI for growth" may further narrow. For companies already experiencing negative cash flow and lacking compelling growth stories, stock price volatility could be more intense than in the July round.
Regarding the September policy meeting, a more accurate description for now is that a rate hike has transformed from a low-probability event nearly ruled out at the beginning of the year into a mainstream scenario with over 50% probability in market pricing. For crypto asset and related US stock investors, oil price trends, monthly CPI data, and Fed officials' remarks at events like the Jackson Hole Symposium will be key windows over the next month for observing whether the probability of a hike further solidifies.
