Fed's $90 Oil Problem Weighs on Bitcoin as Rate Hike Expectations Remain High

The Federal Reserve is facing a tough decision as it navigates between weak labor market data and surging oil prices. The latest jobs report showed a slower pace of hiring, with July job openings holding at 7.3 million. However, the data failed to shift expectations for another rate increase in September.

Data from CME FedWatch shows that the probability of a September rate hike remains high at 66%, up from about 60% following Fed Chair Kevin Warsh's Jackson Hole speech. The report also revealed that hiring and quits remained little changed, with only minor revisions to previous estimates.

The inflation-driven repricing is being reinforced by higher energy prices and Treasury yields. West Texas Intermediate crude oil surged 5.2% to settle at $90.22 per barrel, while the two-year yield rose to 4.39%. The combination of factors has left Bitcoin facing a less forgiving backdrop than expected.

The reversal in rate expectations also had an impact on cryptocurrency markets, with US spot Bitcoin ETFs recording net outflows of $236.46 million on September 1. This removed a source of institutional support as Bitcoin slipped below $77,000.

Some experts argue that the Fed's decision to raise rates in response to an externally driven energy shock could compound economic damage. Higher crude prices raise transport and production costs, reduce household purchasing power, and squeeze corporate margins. The next employment report could change the balance of the debate, with a materially weak payroll data challenging the view that employment remains consistent with full employment.