October’s “no hike” is a reprieve; December’s 72% verdict is the real sentence
If the Fed stands pat this week, that’s not bullish.
It means the market is setting up a bigger landmine for December.
The FOMC meeting early Thursday morning. Latest CME data: the probability of rates staying unchanged in October is 90.6%.
Latest CME FedWatch pricing: the probability of a 25-basis-point hike in December is 67.5%, plus a 6.7% probability of a 50-basis-point hike, for a cumulative hike probability of about 74%.
A month ago, fewer than half of investors were betting on a December hike.
David Mericle, Goldman Sachs’ chief U.S. economist, said: Most Fed officials support “hiking 25 basis points every other meeting.” September’s hike just happened, October will be skipped, and there will be another hike each in December and next March.
Goldman Sachs has characterized December as the “second and final” hike of this cycle.
October is a reprieve for the market from Warsh. December is the verdict.
Why is October’s “calm” cover for December?
Because with the federal funds rate stuck at 3.75%—4.00%, that level is itself a daily bleeding holding cost for a zero-yield asset like BTC.
More importantly, the September dot plot showed that 16 of 18 officials expected at least one more hike this year, 4 expected two more hikes, and not a single one expected a rate cut this year.
The officials have already cast their votes. October is just making them wait six more weeks.
The market expects September core PCE to rise to 3.1% year over year (previously 3.0%), and overall PCE to reach 3.6% year over year (previously 3.4%).
If the data come in as expected, Warsh will have almost no room to send any dovish signals at the press conference.
Goldman Sachs has already made its position clear: the recent tightening in financial conditions of about 30 basis points is “far from enough to substitute for a rate hike.” FCI tightening isn’t a policy shift; it’s the market digesting things early on the Fed’s behalf.
Inflation is accelerating, and the data are backing him into a corner.
Q3 GDP forecast of 3.2%+ and accelerating PCE → expectations of rising real rates → increased discount-rate pressure → high-valuation risk assets come under pressure first.
Over the past week, BTC has fallen only about 2%, while the Nasdaq is down more than 5%. Some will say: See, BTC is decoupling.
Don’t believe it.
A smaller drop in BTC doesn’t mean it’s immune; it only means selling pressure hasn’t been released all at once yet. In the week when a December hike goes from “probability” to “fact,” risk assets won’t fall in stages; they’ll all rush to sell wherever liquidity is best. BTC is always on that list.
If there’s no rate hike in October, the market will breathe a sigh of relief.
That breath will be just enough to get you through to December.
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